prudent investor newsletters

PSEi 30: The ICTSI Show

noreply@blogger.com (Unknown) — Sun, 07 Jun 2026 02:28:57 +0000

For most people, the most dangerous self-delusion is that even a falling market will not affect their stocks, which they bought out of a canny understanding of value—Leon Levy

In this issue

PSEi 30: The ICTSI Show

I. PSEi’s 30 Regional Outperformance

II. Misleading Index Performance (MSCI World, KOSPI)

III. The Ideological Foundation

IV. How Does This Relate to the PSEi?

V. One Stock, One Index

VI. Volume, Float, and the Shape of the Market

VII. The Intraday Pattern

VIII. Participation Collapse and Capital Consumption

IX. Conclusion: A Late-Cycle Signal

PSEi 30: The ICTSI Show

How concentration, liquidity, and selective speculation are reshaping the Philippine benchmark

I. PSEi’s 30 Regional Outperformance

Amid simmering political controversy over control of Senate leadership—which will ultimately oversee the forthcoming impeachment proceedings against the Vice President—the Philippine Stock Exchange Index (PSEi) emerged as Asia’s top-performing equity benchmark for the week, rising 2.94%.

Figure 1

This occurred against an otherwise weak regional backdrop. Rising sovereign yields and continued geopolitical uncertainty weighed on sentiment, leaving most Asian bourses under pressure. While a few benchmarks—such as Japan’s Nikkei, Singapore’s STI, and Taiwan’s Taiex—briefly touched intraweek highs, softer closes erased much of the momentum. Indonesia’s sharp correction and weakness in South Korea’s KOSPI dragged broader regional averages lower. (Figure 1, upper window)

Yet headline index performance can mislead.

II. Misleading Index Performance (MSCI World, KOSPI)

Indices are not neutral reflections of reality; they are constructed representations shaped by methodology, market capitalization, and momentum. They measure a perspective.

Take the MSCI World Index. The MSCI World purports to track 23 developed markets, yet the US now accounts for roughly 72.45% of the benchmark, with information technology alone at 30.6% and financials at 15.33%. (Figure 1, lower image)

In practice, the MSCI World has become a proxy for US mega-cap tech. The label has quietly decoupled from what's actually being measured.

Figure 2

South Korea's KOSPI presents a more dramatic case. Samsung and SK Hynix—dominant in global memory chip supply—recently comprised more than half the KOSPI's market capitalization, piggybacking on the speculative melt-up in US AI stocks. (Figure 2, upper diagram)

SK Hynix joined the trillion-dollar club in late May. The consequence: the KOSPI's headline performance increasingly reflects two companies, not the broader market nor the national economy.

The dislocation is visible in the underlying data. The Korean won hit an all-time low last week as bond yields climbed—a sharp divergence between price signals and fundamental conditions.

Market breadth confirms the distortion: stocks hitting new lows spiked even as those hitting new highs continued to fade. (Figure 2, lower visual)

As liquidity becomes more selective, capital crowds into a narrowing set of perceived winners. Momentum attracts momentum. FOMO and greater-fool dynamics amplify upside moves, especially when leverage enters the system. The result is not broad-based prosperity but increasingly concentrated leveraged speculative blowoffs.

Figure 3

China offers a parallel. Margin financing has surged to levels exceeding those seen during the 2015 equity boom, even as the Shanghai Composite remains below its prior peak. Reaching lower index highs despite greater leverage suggests diminishing returns from credit-fueled speculation: progressively more debt is required to generate the same market effect. (Figure 3)

Rising concentration, speculative blowoffs, and record leverage: these are not isolated anomalies. They are convergent signals of late-cycle excess.

III. The Ideological Foundation

This matters because modern central banking increasingly views asset prices as transmission mechanisms of economic policy.

The logic is straightforward: higher asset prices generate wealth effects, encourage borrowing, support collateral values, and stimulate spending. In this framework, liquidity injections and policy backstops become implicit supports for financial assets.

Former Federal Reserve Chair Ben Bernanke summarized this philosophy in the aftermath of the dot-com era:

There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse

That single quote explains the architecture that followed: the successive rounds of monetary accommodation, the reflexive backstops, the tolerance for leverage—all premised on the belief that a competent central bank can contain the fallout from any speculative excess it helped create. Markets did not merely become politicized. They became instruments of policy, kept elevated by design.

IV. How Does This Relate to the PSEi?

The Philippine market increasingly displays similar characteristics.

Figure 4

The long-term divergence between the PSEi and International Container Terminal Services Inc. (ICTSI) has become difficult to ignore.

Since the PSEi peaked in 2017 and entered a prolonged period of stagnation—a bear market, ICTSI has continued to surge, with recent price action increasingly resembling a parabolic advance. (Figure 4, upper window)

As ICTSI reached a record high of Php 875 on June 3, its weight in the PSEi climbed to roughly 25.5%. (Figure 4, lower chart)

The implications are significant.

V. One Stock, One Index

For the week, the PSEi gained a net 169.72 points, or 2.94%. Yet ICTSI alone contributed approximately 177.63 points to the index. Put differently, ICTSI accounted for more than 100% of the benchmark’s weekly advance (gross), while the remaining components collectively added little or acted as offsets.

The broader composition of returns reinforces this imbalance.

Figure 5

Across the PSEi’s 30 members, average weekly performance was only around 0.12%, with 16 issues actually posting losses. Although four of the biggest market cap issues advanced, ICTSI’s 13.62% surge overwhelmingly dominated benchmark performance. (Figure 5, topmost pane)

Even outside the benchmark, the divergence becomes evident. The broader All Shares Index rose only 1.63%, while aggregate market capitalization increased 2.17%—both materially below the PSEi’s gain.

Year-to-date performance paints an even starker picture: ICTSI’s share price has surged by 50.8%, while 22 of the 30 listed issues have declined. Remarkably, ICTSI’s strong gains have helped compress overall market losses to an average of just 6.7%! (Figure 5, middle chart)

VI. Volume, Float, and the Shape of the Market

Liquidity concentration tells a similar story.

ICTSI accounted for roughly 29.5% of main board trading volume during the week, exceeding 32% in the final three sessions.

Foreign buying represented around 9.3% of ICTSI turnover.

Yet in today’s financialized system, “foreign buying” deserves nuance: overseas registration does not necessarily imply independent foreign institutional capital, as such flows may also reflect affiliates, intermediaries, or networked financial structures linked to domestic interests.

Broker concentration adds another layer. The top ten brokers accounted for an average of approximately 64% of main-board turnover, underscoring the degree to which market activity remains concentrated among a relatively narrow set of big cap issues.

This raises a fundamental question about representation.

The PSEi 30 is intended to track the performance of the country’s 30 largest and most actively traded listed firms and is commonly treated as a barometer of Philippine business conditions.

Yet context makes the weight anomaly stranger still: ICTSI ranks 16th among PSEi 30 constituents by published assets—Php 568 billion as of Q1 2026. It is not the largest company in the index.

It is simply the one commanding the most speculative attention or one company has increasingly come to define the behavior of a benchmark meant to represent an entire market.

Notably, unlike the AI-driven concentration seen in global technology benchmarks, there is little evidence of comparable speculative spillover among ICTSI’s global peers.

Adani Ports and Shanghai International Port—both larger operators—show no equivalent price behavior. The parabola is local. (Figure 5, lowest images)

That divergence makes ICTSI’s acceleration even more striking.

VII. The Intraday Pattern

Figure 6

Four of the five trading sessions this week followed a recognizable structure: early pumps, momentum that faded or peaked into the close, and pre-close dumps in three of those four sessions. (Figure 6)

The sequence is not random. Concentrated positions—anchored around largest cap names with broker coordination—set up a strong open. When momentum peaks or the desired level is reached, supply materializes into the closing dump, leaving retail and non-cartel institutional participants on the wrong side of the book. And insiders rearm for the next day’s trade.

The redistribution dynamic here is straightforward: those who set the opening tone capture the gains; those who follow the signal absorb the unwind.

The result is similar: headline index strength masks increasingly fragile breadth underneath.

It is visible in the intraday data with unusual clarity.

VIII. Participation Collapse and Capital Consumption

Despite repeated modernization initiatives—including digital onboarding, reduced board lots, REIT expansion, market-structure reforms, and other capital-market development programs—active participation in the Philippine equity market has continued to deteriorate.

Figure 7

Active investor participation fell to a record low of 11.8% in 2025. More strikingly, institutional participation did not merely decline in activity; the absolute number of enrolled institutions contracted from 32,284 in 2024 to 29,910 in 2025. (Figure 7, upper pane)

The participation collapse is not a failure of access. It is a rational response to a market that has repeatedly demonstrated that insiders capture the gains while latecomers absorb the distribution.

This has broader political-economy implications.

Sustaining elevated asset prices is not solely about investor confidence or market optics. Equities also function as collateral. Rising share prices support credit expansion directly through pledged securities and indirectly through valuation effects on parallel assets, balance sheets, and spending behavior.

The reflexive relationship between asset prices and credit expansion is not a side effect of the system. It is one of its central operating mechanisms of fiat systems.

In this sense, supporting financial asset prices becomes intertwined with a broader economic model dependent on liquidity, leverage, and wealth effects. Policies such as CMEPA, PERA, and related capital-market initiatives reflect this orientation by theoretically channeling savings toward financial assets and expanding the investor base upon which asset-price support depends.

Instead, what this produces over time is capital consumption disguised as capital formation. Savings intermediated through a distorted pricing mechanism do not necessarily accumulate into productive capital; increasingly, they facilitate redistribution and economic maladjustments.

The weekly headline performance of the PSEi may communicate one story. Market breadth, volume concentration, and participation trends suggest another.

Concentration, however, carries its own tradeoffs.

The more a benchmark depends on a single company, a dominant narrative, or a narrow liquidity channel, the less representative—and potentially more fragile—it becomes.

When one stock increasingly becomes the market, the benchmark may no longer be signaling broad economic strength. Instead, it may be signaling the progressive narrowing of the channels through which liquidity continues to flow.

IX. Conclusion: A Late-Cycle Signal

The PSEi's recent outperformance may say less about broad Philippine corporate strength, the economy and more about the extraordinary influence of a single firm.

ICTSI's dominance increasingly resembles concentration dynamics observed in other late-cycle markets: narrow leadership, selective liquidity, weakening breadth, and a widening divergence between financial performance and underlying participation.

The key question is not whether ICTSI can continue to rise indefinitely or even whether its advance can catalyze a broader re-rating across PSEi constituents. Rather, it is whether a benchmark increasingly dependent on a single stock reflects the progressive narrowing of liquidity channels, exposing deeper market, financial, and economic fragilities characteristic of a late-cycle environment.

A market sustained by increasingly narrow leadership may prove particularly vulnerable to external shocks, especially when global liquidity conditions tighten. The recent crash of Indonesia's JKSE amid mounting currency pressures illustrates how quickly seemingly stable market narratives can unravel once economically sensitive conditions turn less favorable. (Figure 7 lowest diagram)

Stagflation Part 8: Manufacturing Resilience — The PSEi 30 Under Stagflationary Pressure, BSP Accommodation, and the Financialization of Fragility

noreply@blogger.com (Unknown) — Sun, 31 May 2026 07:50:32 +0000

Modern systems do not fail when they become fragile. They become fragile because they have already failed—structurally and long before that failure becomes visible. The more decision-making is centralized, the more lived knowledge is replaced by abstract representations detached from reality—Luc Lelièvre

In this issue

Stagflation Part 8: Manufacturing Resilience — The PSEi 30 Under Stagflationary Pressure, BSP Accommodation, and the Financialization of Fragility

I. Preamble: The Politics of “Resilience” — When Confidence Becomes Policy

II. We Called the Mechanism in Stagflation Part 6! Banking Risks Now Surfacing in the Mainstream

III. Tightening Optics, Accommodative Plumbing: The BSP’s Expanding Relief Architecture

IIIA. From April’s Regulatory Relief to the First Rate Hike

IIIB. Capital Relief or Quiet Capital Erosion?

IIIC. BSP Circular 1233: Prudential Tightening or Statistical Theater?

IV. The PSEi 30: Q1 Earnings Stall as Debt Accelerates, Hits Record Highs

IVA. When Stagflation Enters Finance

V. Lipstick on a Pig: Financializing Weakness, Manufacturing Resilience via Engineered Market Concentration, UITF Easing and PERA Nudge

VA. The Masquerade of PSEi’s 30 Concentration Activities

VB. Banking and Other Financial Corporates (OFC)

VI. Conclusion: When False Stability Weakens Adaptation and Magnify Crisis Risk

Stagflation Part 8: Manufacturing Resilience — The PSEi 30 Under Stagflationary Pressure, BSP Accommodation, and the Financialization of Fragility

How stagflationary pressures, BSP tightening optics, and the PSEi 30 mirage increasingly coexist with accommodative plumbing—masking deeper balance-sheet stress beneath headline stability

I. Preamble: The Politics of “Resilience” — When Confidence Becomes Policy

“Resilience” has increasingly become one of the most overused nouns in political economy.

Like “inclusive growth,” “sustainability,” or “transformation,” it risks becoming a euphemism—less a description of underlying conditions than a linguistic instrument for preserving confidence in an increasingly fragile system.

It recalls the inverse logic of Otto von Bismarck’s warning on politics: never believe anything in politics until it has been officially denied. In modern monetary systems, denial rarely arrives explicitly. It comes mediated through language. Stress becomes “manageable.” Risks become “contained.” Fragility becomes “resilience.”

Yet language has motive.

The Financial Stability Coordination Council (FSCC), in its May 20, 2026 quarterly meeting, maintained that the banking sector "remains resilient" while simultaneously warning of rising vulnerabilities from household and corporate leverage, energy-sensitive sectors, higher-for-longer interest rates, and mark-to-market pressures from elevated bond yields. The council also identified the ongoing Middle East war, risks to repayment capacity, and potential deterioration in bank asset quality as concerns requiring close monitoring.

Even so, regulators stopped short of expressing concern about systemic stability, maintaining that the banking system remains resilient.

At first glance, this appears contradictory. But in a fiat-credit economy, the contradiction is functional.

A modern central bank cannot openly emphasize fragility without risking the very instability it seeks to avoid. If authorities were to fully acknowledge banking weakness, depositors could reassess confidence, lenders could tighten credit, liquidity preference could rise, and financial conditions could deteriorate in reflexive fashion—potentially increasing the risk of deposit flight or even a bank run.

Confidence, therefore, is not merely a byproduct of policy; it is itself a policy objective.

This matters more today because the Philippine economy has quietly become more dependent on liquidity and leverage than in prior cycles. As discussed in Part 6, domestic claims reached 81.3% of GDP in Q1 2026, while M2 and M3 remain materially above pre-pandemic norms. Banking intermediation increasingly substitutes for weakening organic growth.

Liquidity has not flowed neutrally.

It increasingly migrated toward sovereign financing, speculative infrastructure, utility expansion, real estate carry structures, politically favored sectors, and household leverage sustained through credit accommodation.

The result produced nominal resilience—but one increasingly dependent on continued balance-sheet expansion.

The irony is difficult to miss.

The sectors regulators themselves now identify as vulnerable—utilities, energy-sensitive firms, rate-exposed borrowers, and bond-exposed balance sheets—are precisely the channels through which post-pandemic liquidity was transmitted.

Higher yields pressure securities portfolios. Elevated oil prices weaken already strained household cash flows. Slowing real activity compresses repayment capacity. Inflation erodes purchasing power.

In short, the Iran conflict may act as accelerant. But the fragility predates the shock.

The more uncomfortable reality is that what policymakers increasingly describe as isolated “pockets of vulnerability” may instead reflect the cumulative consequences of a debt-financed adjustment regime—one built on widening savings-investment gaps, fiscal accommodation, politically mediated capital allocation, and increasingly flexible financial constraints.

Resilience, in this context, stops being descriptive.

It becomes functional.

And once confidence management becomes policy, a deeper fragility emerges: the stronger the incentive to suppress negative feedback, the greater the eventual adjustment once reality overwhelms narrative.

The risk is a prolonged Wile E. Coyote phase—where lending, nominal GDP, and asset prices continue moving forward even as the balance-sheet ground beneath them quietly disappears.

As corrective signals are muted, deferred, or absorbed, the system becomes less responsive to the maladjustments accumulating within it. The resulting precarity stems not only from the imbalances themselves, but from the growing uncertainty over how much adaptive capacity remains.

Stability may persist for far longer than expected, but the longer adjustment is deferred, the less anyone can know whether apparent resilience reflects genuine robustness or simply an increasingly fragile inability to register the need for change.

II. We Called the Mechanism in Stagflation Part 6! Banking Risks Now Surfacing in the Mainstream

Our long-standing argument is now acknowledged by authorities!

In Part 6, we argued that Philippine banking fragility was not yet obvious in headline indicators because deterioration remained concealed beneath denominator effects, regulatory flexibility, and liquidity expansion.

The central mechanism was straightforward.

As nominal lending continued to expand, reported metrics such as net nonperforming loans and provisioning ratios could appear stable—even if underlying repayment quality weakened beneath the surface. Faster loan growth mechanically improved ratios.

In short: deteriorating credit quality could be hidden by expanding balance sheets—Wile E. Coyote dynamics or the denominator effect.

We also warned that sovereign absorption, utility concentration, electricity-sector leverage, and rising interest-rate sensitivity were quietly intensifying banking vulnerabilities.

Recent regulator commentary increasingly validates those channels.

Electricity exposure—long treated as a politically protected earnings corridor—has become increasingly central to financial stability concerns. This should not surprise readers of this series.

For years, policy increasingly encouraged indirect support mechanisms across the sector: government-facilitated transactions (SMC-AEV-MER, and Prime Infra-FGEN deals), real property tax suspensions, market transfer arrangements (eg. FIT-all, GEA-all etc.), and pricing interventions designed to stabilize politically sensitive energy channels (e.g. suspension of WESM, etc.).

What appeared as sectoral support increasingly resembled distributed bailout architecture.

Meanwhile, emergency measures following the oil shock intensified the dilemma.

April's regulatory relief—borrower restructuring flexibility, grace periods, softer recognition standards, and prudential accommodation—may help stabilize near-term financial conditions. Yet such measures inevitably complicate the task of interpretation and reactions.

When institutions receive greater flexibility during periods of mounting stress, distinguishing genuine resilience from deferred recognition becomes increasingly difficult. Reported stability may reflect improved fundamentals. It may also reflect the temporary suspension of constraints that would otherwise force adjustment into the open.

As recognition becomes more discretionary, financial signals lose informational clarity. Firms facing deteriorating conditions have strong incentives to extend maturities, restructure obligations, refinance exposures, and seek regulatory accommodation wherever available. While such actions may be individually rational, they can collectively transform temporary relief into a mechanism for postponing adjustment.

Nor should the possibility of malfeasance be entirely discounted. As Charles Kindleberger observed, the pressures that emerge during late-stage financial cycles often generate incentives that extend beyond mere forbearance.

The imperative to preserve solvency, liquidity, or market confidence can encourage increasingly aggressive efforts to sustain appearances, blurring the distinction between prudent adaptation, financial engineering, and outright concealment.

The consequence is a progressive deterioration in the quality of feedback available to market participants and policymakers alike. As losses are deferred, risks reclassified, and vulnerabilities absorbed into layers of accommodation, it becomes increasingly difficult to determine whether observed stability reflects genuine robustness or merely the continued suppression of adjustment.

Thus, the latest warnings matter less because they reveal something new.

They matter because they increasingly reveal the logic we outlined ex ante.

The precise timing remains uncertain.

But the mechanism has become harder to ignore.

III. Tightening Optics, Accommodative Plumbing: The BSP’s Expanding Relief Architecture

IIIA. From April’s Regulatory Relief to the First Rate Hike

The BSP’s recent policy trajectory increasingly reveals an uncomfortable contradiction.

Official rhetoric increasingly emphasizes inflation vigilance and prudence. Yet beneath the surface, regulatory accommodation continues to proliferate.

This contradiction became increasingly visible following the oil shock.

On one hand came the first rate hike, accompanied by warnings over inflation persistence, second-round effects, and financial risks.

On the other came expanding flexibility:

loan restructuring accommodations
borrower grace periods
relaxed nonperforming-loan treatment
regulatory discretion
liquidity backstops
and eventually capital flexibility itself

The message increasingly became clear: tightening optics above, accommodative plumbing below.

IIIB. Capital Relief or Quiet Capital Erosion?

The BSP's "positive neutral" countercyclical capital framework should not be mistaken for technical housekeeping.

At its core lies a material shift: part of what previously functioned as hard CET1 capital effectively becomes releasable under Monetary Board discretion.

Total capital may remain unchanged on paper.

But the composition of constraints changes.

This distinction matters because hard floors increasingly become conditional floors.

The textbook defense is straightforward: buffers built during good times should be releasable during stress to prevent procyclical deleveraging.

In theory, reasonable. In practice, difficult.

Pandemic-era forbearance offers the clearest preview. What began as emergency accommodation was extended, normalized, and gradually embedded into institutional expectations. Regulatory relief, like fiscal interventions, exhibits a well-documented tendency toward persistence—not through intent, but through path dependence, where withdrawal becomes politically and economically costly before conditions fully normalize.

Because Philippine banks entered this cycle amid slowing loan growth, sovereign crowding, maturity pressures, concentrated sectoral exposure, and weakening organic activity.

The assumption that released buffers will later be rebuilt quietly assumes future conditions normalize.

History suggests otherwise.

Temporary relief often becomes structural because withdrawal becomes politically costly.

Emergency support evolves into expectation.

Constraint becomes discretion.

And discretion reshapes incentives.

Institutions facing balance-sheet pressure naturally adapt to the policy environment they are given. The greater the availability of regulatory flexibility, the stronger the incentive to preserve existing positions, defer adjustment, and rely on future accommodation. Over time, market discipline corrodes, entrenching dependence on regulatory mediation, where rules mutate arbitrarily and authority shifts at whim.

This is where the issue extends beyond prudential policy into political economy.

Policy is never neutral. Discretion is never exercised in a vacuum. It creates winners and losers, protects some balance sheets more than others, and inevitably attracts pressure from the institutions most affected by its use. Its effects accumulate over time, compounding distortions and entrenching the power of those best positioned to exploit regulatory discretion.

Regulatory capture need not take the form of explicit collusion. More often, it emerges gradually through shared assumptions, institutional proximity, informal bargaining channels, and the structural alignment of incentives between regulators and the regulated. Policy formation in highly regulated financial systems is inherently political; it is shaped not only through formal rulemaking, but also through sustained interaction between supervisory authorities and systemically important institutions, particularly during periods of stress.

For instance, the BSP Monetary Board is presently populated by former bankers, multinational executives, and a member of the country's economic elite. Consequently, professional experience, personal networks, and political or ideological leanings may shape how risks are perceived, priorities are defined, and policy decisions are made.

In such contexts, influence is rarely exercised through overt transactions. It operates instead through coordination, dialogue, logrolling, and the revolving door dynamics that amplify the implicit weight carried by institutions whose stability is deemed systemically significant.

Over time, such dynamics risk weakening both the foundations of the financial architecture and the credibility of the information it produces.

Rules become increasingly negotiable, constraints more contingent on supervisory discretion, and reported conditions less reflective of underlying risks. The result is a gradual erosion of transparency, market discipline, and public confidence in the regulatory framework.

As more capital requirements become contingent on regulatory judgment, observed resilience becomes harder to evaluate. Investors are left asking whether stability reflects genuine financial strength—or whether it increasingly reflects an environment in which constraints are assumed to be adjustable when stress emerges.

IIIC. BSP Circular 1233: Prudential Tightening or Statistical Theater?

At first glance, BSP Circular 1233 appears prudentially tighter.

Guarantees increasingly receive capital treatment according to the standing of guarantors rather than blanket recognition. Credit protection is thus no longer treated uniformly, but differentiated according to counterparty strength and exposure structure.

Technically, this represents improved risk sensitivity.

But the more important question is not whether rules tightened on paper.

It is who is positioned to operate within—and benefit from—increasingly complex rules.

Modern prudential systems increasingly rely on statistical abstractions: risk weights, internal models, guarantee structures, offsets, and supervisory discretion. The danger is not only mismeasurement. It is that complexity itself becomes a mode of governance.

When constraints become sufficiently intricate, compliance shifts from rule-following to interpretation or workarounds. Large financial institutions—with sophisticated treasury operations, legal capacity, and cross-border affiliates—gain greater ability to restructure exposures, redistribute risks internally, and optimize regulatory outcomes through affiliated guarantees and balance-sheet engineering.

What appears as improved prudential precision may simultaneously expand the scope for regulatory arbitrage.

The key question becomes:

Did risk truly decline—or merely migrate across affiliated balance sheets while reported ratios improved?

This distinction matters because guarantees are not exogenous anchors of stability. During periods of stress, guarantor strength often proves endogenous to the same financial cycle it is meant to stabilize. Apparent backstops can weaken precisely when they are most needed.

But the deeper issue is not only measurement or migration.

It is opacity combined with declining adaptive capacity.

Resilience increasingly becomes modeled rather than market-tested. But models are ex-post reconstructions of risk built on reduced variables, whereas markets reflect ex-ante conditions through continuous adaptive feedback. Systems that appear stable under refined metrics may therefore lose the feedback mechanisms through which corrective responses are generated, as interventions accumulate and progressively displace endogenous adaptive processes.

This is why periods of stress are often misread as the beginning of failure. By the time fragility becomes visible, it has typically been embedded for some time; what changes is not the underlying instability, but its expression.

The real risk is that they continue to function after losing the capacity for effective correction.

In this sense, stability itself can become misleading: it may reflect not robustness, but the gradual weakening of feedback mechanisms that normally reveal and correct accumulated risk.

IV. The PSEi 30: Q1 Earnings Stall as Debt Accelerates, Hits Record Highs

Q1 2026 reveals a structural divergence in the PSEi 30: revenues expanded by 8.55%, yet net income contracted by 4.11%—the first broad-based earnings decline in the post-pandemic cycle.

At the same time, non-financial corporate debt rose by 10.1% to approximately a record Php 6.079 trillion, even as GDP growth slowed to 2.8% and nominal momentum weakened.

This divergence is increasingly consistent with an early stagflationary configuration: weakening earnings momentum alongside persistent leverage expansion and slowing real activity.

Figure 1

Q1 revenue growth accelerated from 3.92% to 8.55%, broadly tracking the rise in CPI from 2.3% to 2.8%, even as GDP growth weakened sharply from 5.4% to 2.8%. The divergence between nominal revenue expansion and real activity suggests price-led rather than volume-driven growth. (Figure 1, topmost window)

At the same time, aggregate net income declined by Php 11.6 billion—the first contraction since the 2020 recession—driven by a compression in margins, with the PSEi 30 net income margin falling from 16.34% to 14.43%. (Figure 1, middle image)

Profitability weakness was not uniform but reflected sector-level margin erosion, as illustrated by firms such as Jollibee, where revenue growth coincided with gross margin compression and earnings reverting toward prior cyclical lows. (Figure 1, lowest graph)

Figure 2

Signs of demand fatigue were also evident in real estate, where major developers (SMPH, ALI, MEG, and RLC) recorded a combined revenue contraction of approximately 3%, despite sectoral real GDP growth of 3.3%, reinforcing a multi-year downtrend since 2022. This points to weakening discretionary consumption, with spending increasingly shifting toward essentials. (Figure 2, topmost pane)

Non-financial corporate net debt increased by Php 557.4 billion, pushing total gross debt to approximately Php 6.078 trillion, or roughly 16% of financial assets. (Figure 2, middle visual)

The increase was highly concentrated, with San Miguel Corporation alone accounting for approximately Php 157.4 billion of additional borrowing, bringing its total debt to an astounding Php 1.668 TRILLION (!!!)—underscoring the scale mismatch between individual balance sheets and aggregate market structure. (Figure 2, lowest chart)

Outstanding Philippine banks borrowings hit a record Php 2.06 trillion in March.

San Miguel’s debt stands out, as it is likely to exceed its annual revenue (PHp 1.485 trillion in 2025), while its market capitalization represents only about 10% of that scale. Notably, San Miguel has yet to publish its Q1 2026 analyst briefing, which would represent an unusual omission if it were to be delayed or foregone.

San Miguel’s financing increasingly resembles Hyman Minsky’s “debt-in, debt-out” dynamic, where sustained borrowing is accompanied by asset sales and refinancing activities used to service and roll over expanding obligations. In Minskyan terms, this edges toward Ponzi finance, where debt servicing becomes increasingly dependent on continued access to new financing rather than internally generated cash flows.

Figure 3

A significant portion of revenue and asset growth also appears structurally mediated, including effects from regulated pricing, energy-related asset transfers, and fiscal-linked spending (Figure 3, topmost pane), while REIT revenues were supported by balance-sheet and asset reclassification effects.

Notably, PSEi 30 revenues relative to GDP remained broadly unchanged year-on-year, underscoring the persistent concentration of economic activity and the disproportionate benefits accruing to firms positioned along major policy transmission channels. (Figure 3, middle diagram)

Amid income shortfalls, net cash accumulation rose to its highest level since 2023, coinciding with BSP rate cuts in Q1 2026—suggesting a preference for liquidity buffering rather than immediate capital deployment. (Figure 3, lowest chart)

IVA. When Stagflation Enters Finance

Here is the diagnostic:

In a conventional cycle, borrowing responds to earnings and growth expectations.

In Q1 2026, the sequence is inverted: leverage expands into weakening profitability. This suggests that borrowing is increasingly driven by refinancing needs, liquidity pre-funding, cash reserve build-up and policy accommodation rather than productive expansion.

The composition of growth reinforces this shift. Revenue gains are increasingly concentrated in utilities, regulated sectors, FX-sensitive firms, and entities linked to fiscal and infrastructure transmission channels, while real estate contracted and several constituents recorded outright revenue declines.

Growth is therefore increasingly shaped by pricing regulation, fiscal flows, currency effects, and balance-sheet reallocation rather than broad productivity gains.

As a result, the economy increasingly exhibits late cycle distributional rather than organic expansion: output is present, but its drivers are structurally mediated rather than market-diffused.

Debt dynamics show a similar pattern of concentration.

Figure/Table 4

A significant share of new issuance is clustered within large conglomerates, particularly the SMC–AEV–MER nexus, while much of the incremental borrowing appears to accumulate as cash buffers and liquidity reserves rather than productive investment. (Figure/Table 4)

Debt is thus increasingly precautionary—functioning as refinancing insurance and balance-sheet restructuring rather than capital formation.

The market, in turn, increasingly prices access to liquidity rather than earnings growth.

This reflects a regime in which policy transmission, refinancing conditions, and structural allocation effects dominate forward-looking valuation signals. Leverage sustains continuity in a low-earnings environment rather than amplifying expansion.

These dynamics did not emerge in a vacuum. They reflect long-standing structural forces that have compounded through a self-reinforcing process over time.

The result is a deepening stagflationary structure: earnings stagnation coexisting with credit expansion, sustained not by income growth but by liquidity accommodation and refinancing continuity.

V. Lipstick on a Pig: Financializing Weakness, Manufacturing Resilience via Engineered Market Concentration, UITF Easing and PERA Nudge

If fragility is increasingly accumulating beneath the surface, recent BSP-linked developments suggest a growing preference for financial mediation over structural adjustment.

The relaxation of UITF concentration limits, alongside renewed PERA incentives and CMEPA-linked measures, did not occur in isolation.

While formally presented as market development initiatives, these adjustments operate within a system that is already structurally concentrated, where a small number of firms dominate liquidity, index weighting, and price formation.

VA. The Masquerade of PSEi’s 30 Concentration Activities

Market structure reinforces this tendency. A narrow set of issuers increasingly drives free-float capitalization and trading activity, with liquidity clustering in fewer names and deeper concentration in benchmark influence.

Figure 5

ICTSI, for instance, accounted for approximately 23.36% of free-float market capitalization as of 28th May 2026, down slightly from a prior May peak of 23.9%, while simultaneously contributing around 22.5% of monthly main board volume. This concentration has lifted the top five constituents to more than 53%—a record—of the PSEi’s free-float weight. (Figure 5, upper and lower charts)

Despite a 27.3% increase in total stock market accounts to 3.641 million in 2025, participation quality deteriorated sharply.

Figure 6

In 2025, active retail accounts fell from 23.1% to 11.7%, while active institutional accounts declined from 19.5% to 14.6%. Institutional participation also contracted in absolute terms, from 32,284 to 29,910 accounts—suggesting not merely inactivity but structural consolidation.

Retail participation, meanwhile, remained largely passive, accounting for only around 16% of total turnover in 2024, while the top ten brokers consistently captured roughly 60% of daily trading activity.

Market microstructure further suggests that liquidity is not only concentrated but also artificially structured.

Price‑setting activity increasingly clusters around specific intraday windows—for example, coordinated patterns I call “afternoon delight,” post‑recess pumping, and pre‑closing float pumps and dumps—consistent with liquidity recycling among a narrow set of market heavyweights such as ICTSI.

This dynamic creates structural asymmetries in execution quality and timing. Cartelized institutional actors—by virtue of scale, privileged information access, and market impact capacity—are positioned to internalize gains from volatility, while retail participants are disproportionately exposed to adverse selection and momentum‑driven entry.

What appears as neutral index participation thus embeds a persistent transfer mechanism. Market activity resembles a closed‑loop structure: retail investors enter at any time only to become counterparties to institutional selling, absorb losses, and eventually lapse into inactivity (yes, a Hotel California), while select large‑scale institutions consolidate benefits from elevated prices.

The end result is the steady erosion of savings, the declining quality of public participation, the corrosion of capital markets, and rising fragility within their structures. Mainstream opinion holds that gaming the index is cost‑free—but distorted markets, failing to adjust to unfolding realities, ultimately deliver a reckoning.

Under these conditions, participation becomes statistically broad but functionally narrow. Market depth exists in appearance, not in effective price formation.

VB. Banking and Other Financial Corporates (OFC)

Figure 7

Banking sector dominance reinforces this structure. Universal and commercial banks control approximately 83.05% of total financial resources/assets, with universal banks alone accounting for around 77.1%, both near historical highs. Intermediation is therefore increasingly concentrated within a small number of institutions that also sit at the core of liquidity transmission.

The Other Financial Corporations (OFC) survey data further clarifies this mechanism.

By end-2025, trust assets reached record levels, alongside elevated financial claims and growing exposure to government securities and dominant corporate instruments.

Claims on the private sector, banks, and government all expanded to historical highs in Q4 2025.

In effect, savings increasingly migrate into managed structures, while managed structures increasingly allocate toward sovereign debt, systemically important elite-owned corporates, and highly liquid benchmark assets.

The mechanism is subtle but structurally important: as real purchasing power weakens, financial intermediation intensifies. Weakness is not absorbed by adjustment in the real economy but increasingly processed through financial channels.

Rather than directly confronting deteriorating fundamentals—slower productivity growth, uneven real activity, external sensitivity, and inflation pressure—the system increasingly channels savings into instruments that preserve appearance: stable markets, resilient banks, orderly debt issuance, and supportive sentiment.

This is where fragility becomes self-reinforcing. Stability is maintained not through broad-based strength, but through concentrated flows and repeated accommodation within a narrowing set of financial channels.

In such a system, preserving index stability no longer requires broad participation—only sufficient concentration.

Eventually, the question is no longer whether fragility exists.

It is how much structural mediation is required to prevent it from becoming visible.

VI. Conclusion: When False Stability Weakens Adaptation and Magnify Crisis Risk

Our Part 8 series points to a deeper transformation underway.

Stagflation is no longer confined to slower growth, rising prices, and deteriorating purchasing power. It is increasingly migrating into the financial system itself—reshaping incentives, altering market structure, and changing how weakness is managed.

The evolution and interaction matters.

As earnings weaken and repayment capacity softens, the system increasingly responds not through adjustment but through political mediation: regulatory relief, capital flexibility, refinancing continuity, concentration easing, confidence management, and liquidity accommodation.

At one level, these measures may temporarily stabilize conditions.

But stabilization is not synonymous with adaptation.

The deeper risk is that repeated intervention suppresses the corrective signals through which systems normally adjust. Weak firms refinance rather than restructure. Risks are softened through debt expansion, liquidity support, and regulatory accommodation, while recognition of underlying imbalances is delayed or muted. Financial markets become increasingly dependent on concentrated flows, managed liquidity, and political-institutional reinforcement rather than broad-based participation and market discipline.

The result is a subtle but consequential shift: fragility becomes harder to observe precisely because adaptation weakens.

This helps explain the growing divergences now visible across the Philippine economy and the PSEi 30. Weakening profitability coexists with rising leverage. Slowing real activity coexists with resilient financial optics. Narrower participation coexists with stronger index concentration.

Rather than resolving imbalances, finance increasingly absorbs them.

This is why resilience rhetoric deserves scrutiny.

A system can appear stable for long periods while quietly losing the capacity to respond to mounting maladjustments. Stability, under such conditions, becomes less evidence of robustness than of deferred recognition.

The real danger is that by the time fragility becomes visible, the institutional capacity for adaptation has already been significantly weakened. The reckoning does not disappear; it accumulates. Pressures continue to build beneath the surface until they eventually reach a threshold or a “tipping point” where adjustment can no longer be postponed. The timing remains uncertain. The process does not.

And this is the paradox of modern financial management:

The more aggressively policymakers attempt to suppress instability, the greater the risk that stability itself becomes the mechanism through which future instability accumulates.

____

References (our stagflation series)

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

Stagflation Part 7: The Return of Constraint—Oil Shock, Treasury Revolt, and the Politics of Inflation Suppression

Seed Article

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

Stagflation Part 7: The Return of Constraint—Oil Shock, Treasury Revolt, and the Politics of Inflation Suppression

noreply@blogger.com (Unknown) — Sun, 24 May 2026 03:15:21 +0000

But conscience asks the question, is it right? And there comes a time when one must take a position that is neither safe, nor politic, nor popular, but one must take it because it is right—Rev. Dr. Martin Luther King, Jr.

In this issue:

Stagflation Part 7: The Return of Constraint—Oil Shock, Treasury Revolt, and the Politics of Inflation Suppression

I. Stagflation Is Experienced Before It Is Officially Measured

II. Stagflation: Stagnation, Inflation and the Erosion of Living Standard

III. Growth Illusion: Nominal Stability, Real Deterioration

IV. The Electricity Stagflationary Signal

V. The External Constraint: BoP Stress Extends in April

VI. USDPHP at 63.5: BSP’s Next Maginot Line?

VII. Shrinking GIR and Weakening OFW Remittances

VIII. Constraint Logic: Intertemporal FX Management Adjustment Pathways

IX. ASEAN’s Oil Shock Politics: Singapore-Indonesia’s Divergence

X. When Bond Markets Revolt: The BSP’s Off-Cycle Contradiction—a Panicked Response

XI. Inflation Did Not Disappear: Huge Expansion in Pork Import Quotas, DTI’s Some Prices May Rise

XII. Conclusion: Stagflation as Process, Not Event

Stagflation Part 7: The Return of Constraint—Oil Shock, Treasury Revolt, and the Politics of Inflation Suppression

As oil shocks collide with weakening growth, rising yields, peso pressure, and emergency price management, policymakers increasingly appear trapped between inflation, financial fragility, and political optics.

I. Stagflation Is Experienced Before It Is Officially Measured

For months, the dominant refrain from mainstream commentary has remained familiar: the Philippines is supposedly still “far from stagflation.” GDP remains positive. Employment statistics have yet to collapse. Inflation, though elevated, is repeatedly framed as temporary, externally driven, or merely supply-side “noise.” Even the country’s economic manager continues to insist that conditions hardly resemble stagflation at all: “I don't see it that way”.

By this framework, stagflation exists only once statistical agencies formally certify its arrival.

Until then, everything is supposedly manageable.

But this increasingly mistakes statistical abstraction for lived economic reality.

II. Stagflation: Stagnation, Inflation and the Erosion of Living Standard

Stagflation, in its original political meaning, was never merely an econometric threshold waiting for quarterly confirmation. British politician Iain Macleod coined the term during the 1960s to describe a condition where rising prices coincided with weakening economic conditions and deteriorating living standards.

Only later did technocrats reduce the phenomenon into measurable variables involving GDP, inflation, and unemployment.

Yet historically, stagflation was experienced socially long before it became fully visible statistically.

That distinction matters.

Figure 1

By the same GDP-centric standards repeatedly invoked today, much of the Philippines during the 1970s oil shocks should not immediately have qualified as stagflationary either.

Annual GDP growth was positive throughout the 70s despite severe inflationary waves in 1973 and 1979. (Figure 1)

Yet hardly any Filipinos who lived through that period remember it through national income accounting tables.

They remember collapsing purchasing power, shortages, rationing, long queues, rising household stress, and increasingly constrained choices. They remember wages failing to keep pace with necessities. They remember nominal incomes rising while real conditions deteriorated underneath.

The full statistical expression of stagflation only became undeniable during the 1983 debt crisis, when recession, inflationary pressures, financial instability, and likely surging unemployment converged simultaneously.

But the underlying deterioration had already been building for years. Today’s Iran war oil shock is barely three months old—and still unfolding.

That is precisely the point frequently missed in today’s discussions.

The relevant comparison is not endpoint versus endpoint.

It is trajectory versus trajectory.

And the trajectory increasingly looks familiar.

III. Growth Illusion: Nominal Stability, Real Deterioration

To be clear, today’s Philippines is not a carbon copy of the 1970s.

As previously discussed, the structure of the economy has changed substantially. Industry once occupied a more dominant role, whereas today’s system leans far more heavily on consumption, services, credit expansion, remittance inflows, and financial intermediation.

The political environment has also shifted from outright authoritarianism under Marcos Sr. to the far softer managerial framework of social-(ochlocratic) democratic technocracy under Marcos Jr.

Furthermore, the integrity of GDP data under such a regime could itself be a factor.

But these differences do not eliminate stagflationary dynamics.

In many respects, they may amplify them.

A consumption-led economy does not make the system more resilient. An economy heavily dependent on household spending, leverage, remittances, and fiscal support becomes highly vulnerable to energy, import-cost, inflation and duration shocks—particularly when underlying growth conditions are already weakening and fiscal balances remain increasingly strained.

Rising fuel and transport costs compress discretionary spending directly while simultaneously pressuring operating margins, debt servicing capacity, and government finances.

Higher interest rates further amplify these pressures. In a consumption-heavy economy increasingly reliant on household leverage, inflation shocks do not merely erode purchasing power directly—they also tighten financial conditions precisely when consumers are least capable of absorbing additional strain.

As borrowing costs rise, debt servicing increasingly competes with discretionary spending, weakening consumption even further. Property markets, installment-driven purchases, SME financing, and broader credit-dependent activity all become more vulnerable to deceleration simultaneously.

In this sense, the same credit structures that previously amplified consumption growth can rapidly become transmission channels for economic contraction once inflation and financing pressures intensify.

Unlike advanced economies, such as Singapore (see below) that can partially offset external shocks through productivity gains or export competitiveness, highly consumption-driven systems often absorb the adjustment through household balance sheets and declining real purchasing power.

This is especially important because the present slowdown predates the recent Iran war-related oil shock. GDP growth had already been weakening materially well before the latest geopolitical escalation.

The external shock therefore did not create the underlying fragility. It merely accelerated and exposed conditions already deteriorating beneath the surface.

In such an environment, nominal spending can temporarily persist through subsidies, credit expansion, remittance support, transfers, or dissaving, creating the superficial appearance of resilience even as underlying household conditions weaken materially.

Statistical aggregates therefore remain deceptively stable while households quietly absorb the adjustment through reduced consumption quality, rising indebtedness, deferred maintenance, shrinking discretionary capacity, and growing dependence on political or financial support mechanisms.

If the 1970s featured queues for rationed goods, today’s version increasingly manifests through queues for subsidies, emergency relief, transfers, refinancing windows, and politically mediated ayuda systems.

The form changes.

The mechanism does not.

Again, this is a 3‑month‑old crisis (and counting), compared to the years‑long oil shock of the 1970s—so referencing stagflation in that context is a false equivalence (apples to oranges narrative).

Yet, inflation erodes purchasing power. Households compensate through leverage, reduced discretionary spending, informal coping mechanisms, or dependence on state support. What once appeared as gasoline lines and ration coupons now emerges through subsidy politics and debt-dependent consumption maintenance.

And unlike the abrupt statistical collapse many now seem conditioned to expect, stagflation often develops gradually beneath nominal stability.

IV. The Electricity Stagflationary Signal

Indeed, much of the present deterioration increasingly appears beneath the headline aggregates.

Q1 2026 GDP slowed sharply to 2.8%, continuing a deceleration trend that has persisted since the post-pandemic rebound peak in Q1 2022. Growth had already weakened materially throughout 2025 even before corruption scandals, geopolitical instability, and oil transmission effects intensified.

More importantly, the quality of growth itself continues to deteriorate beneath the surface.

Recent data increasingly confirms this divergence.

Figure 2

Real electricity GDP from Q2 2025 through Q1 2026 registered 0.0%, -1.1%, +0.1%, and +0.5%, respectively—hardly consistent with narratives of expansion. (Figure 2, topmost image)

Was the economy weaker than the 2.8% Q1 2026 GDP headline implies?

Meralco electricity sales volume in gigawatt-hours (gwh) likewise weakened persistently over the same period at -0.33%, -2.08%, -1.3%, and -1.76%. Yet peso-denominated electricity sales surged sharply, especially during Q4 2025 when revenues rose nearly 44%. (Figure 2, middle pane)

Consumers were effectively paying substantially more while consuming less.

This increasingly resembles a classic case of monetary illusion: nominal expenditures rise while real consumption weakens beneath the surface.

Regulatory pass-through mechanisms—including FIT-ALL, GEA-ALL, and other embedded system charges—inflate peso-denominated spending even as underlying electricity demand continues to soften.

What appears statistically as nominal growth is, in effect, a redistribution mechanism embedded within regulated pricing structures rather than a reflection of expanding real activity.

Meanwhile, power producers continue to expand leverage-intensive capital structures, while households absorb the resulting burden through higher system charges. The result increasingly resembles an Averch–Johnson type incentive environment, where regulated capital expansion is implicitly rewarded regardless of weakening underlying consumption conditions.

Listed renewable energy firms—beneficiaries of the GEA-ALL framework—illustrates this dynamic. Aggregate debt increased by 30.15% in Q1 2026, rising by Php 182.41 billion to Php 787.51 billion. (Figure 2, lowest table)

In effect, regulated pass-through charges function as a de facto financing channel for capital expansion in the sector—socializing costs across the consumer base while concentrating investment benefits within a relatively narrow set of utility and renewable energy entities.

In the framework of Frédéric Bastiat, this would be interpreted as a form of “legal plunder”: a system in which redistribution is not carried out through overt taxation alone, but through regulatory and pricing mechanisms that embed transfers within the structure of essential services themselves.

This is the context within which the current stagflation debate should be understood.

The issue is not whether the Philippines has already reached a 1979 or 1983-style endpoint.

The issue is whether the underlying political and institutional mechanisms that generate stagflationary pressure are increasingly active beneath the surface.

These are not merely outcomes such as slowing growth or weakening purchasing power, but the policy-driven structures that shape them: for instance, in the utility sector, regulatory regimes that embed cost pass-through into essential services, capital-biased incentives in regulated utilities consistent with an Averch–Johnson type distortion, and fiscal interventions that increasingly reallocate rather than resolve structural imbalances.

In such a configuration, external shocks act primarily as accelerants rather than root causes. The deeper transmission mechanism lies structurally embedded in domestically accumulated policy distortions, which determine how those shocks propagate through prices, credit conditions, and household consumption. The electricity sector is a clear illustration of this dynamic, but it is not unique in doing so.

Increasingly, the answer appears yes.

Stagflation rarely announces itself all at once.

As a process, it usually emerges quietly beneath nominal stability—until eventually the statistics catch up to what households have already been experiencing for quite some time.

Rising self-reported poverty and hunger rates affecting a substantial share of the population are parallel symptoms.

Moreover, in contrast to mainstream views and even his own economic adviser, President Marcos has recently acknowledged concerns over stagflation risk.

V. The External Constraint: BoP Stress Extends in April

The Philippines’ external imbalance is no longer merely deteriorating.

It appears to be accelerating.

Figure 3

Following the historic Q1 2026 Balance of Payments (BoP) deficit discussed in Part 3, April delivered another significant deterioration: a reported $2.124 billion monthly shortfall, bringing the year-to-date deficit to approximately $7.4 billion by April alone. (Figure 3, topmost window)

In just four months, the Philippines had already exceeded the full-year 2022 BoP deficit of $7.263 billion, while rapidly approaching the BSP’s revised 2026 projection of roughly $7.8 billion.

Put differently, the economy appears to have nearly exhausted its annual external financing buffer before the midpoint of the year.

This matters because the BoP is not an abstract accounting construct.

It is the economy’s external balance sheet constraint: the system through which dollar inflows finance imports, debt servicing, portfolio outflows, and exchange-rate stability.

Persistent deficits therefore imply rising dependence on external financing at precisely the moment when global liquidity conditions are tightening and domestic growth is decelerating.

At its core, the structural issue remains unchanged.

The Philippines continues to operate under a widening (record) savings–investment gap, where domestic investment requirements increasingly exceed domestic savings capacity. The resulting imbalance must be financed externally, making the economy structurally sensitive to shifts in oil prices, global interest rates, and capital flow conditions.

The Middle East oil shock did not originate this vulnerability.

It exposed and accelerated it.

VI. USDPHP at 63.5: BSP’s Next Maginot Line?

Foreign exchange markets have increasingly reflected this pressure.

USDPHP has repeatedly carved record levels, signaling rising demand for dollar liquidity amid widening external financing gaps.

In this context, statements from monetary authorities are interpreted less for their literal content than for their implied reaction function.

When BSP Governor Eli Remolona noted that a peso around Php 63.50 to the dollar “might be okay, as long as the decline is measured and not inflationary,” the statement aligned with the BSP’s long‑standing policy of allowing exchange‑rate flexibility while smoothing volatility rather than defending fixed levels. (Figure 3, middle image)

Yet has the BSP effectively signaled 63.5 as its next “Maginot Line” — a tacit FX target as widening BoP deficits from the savings gap, oil shock, and slowing growth deepen the country’s dollar shortfall?

Markets respond not only to stated policy frameworks; revealed preference matters. For instance, the 59‑level was defended seven times between 2022 and 2025, giving rise to what we described as a “soft peg” regime—effectively a subsidy on the peso that rendered it overvalued. (Figure 3, lowest graph)

The BSP never explicitly declared this as a threshold, but markets recognized it and eventually forced a breakthrough — a reminder that when exchange‑rate weakness nears politically sensitive levels without strong defense, participants quickly adjust their expectations of the true intervention point.

VII. Shrinking GIR and Weakening OFW Remittances

And here’s where things get uncomfortable.

Because the BSP is not merely managing inflation expectations—it is also managing a gradually shrinking external buffer.

Gross International Reserves (GIR) came under visible pressure following a record $6.63 billion drawdown in March and another roughly $2.3 billion decline in April, bringing reserves down to around $104.3 billion.

Figure 4

More importantly, deterioration appears concentrated in the most liquid foreign exchange components, which have fallen toward levels last seen around mid-2015, while foreign investment components weakened toward levels not seen since roughly Q3 2022. (Figure 4, upper window)

Headline GIR therefore risks overstating resilience.

Should the gold‑averse BSP be thanking its residual gold reserves for propping up GIR despite the drawdowns? Would they be offloading more gold to defend the PHP?

The issue is not simply reserve size, but reserve composition and deployability. Sustained intervention to smooth volatility can gradually shift reserves away from immediately deployable foreign assets even when aggregate levels remain superficially stable.

At the same time, external inflows are showing early signs of moderation. OFW remittance growth slowed to 2.3% in March—its weakest pace since mid-2023—bringing year-to-date growth to roughly 2.8%. (Figure 4, lower chart)

That matters disproportionately in an economy where remittances remain a major contributor of dollar liquidity. To the extent that Middle East disruptions contribute to slower inflows—or eventual repatriation risks—the external constraint becomes more complicated than oil alone. It could diffuse to the economy in the form of unemployment and social tensions.

VIII. Constraint Logic: Intertemporal FX Management Adjustment Pathways

At this stage, the adjustment problem increasingly looks structural rather than cyclical.

If dollar inflows weaken while import costs, debt service, and external financing requirements remain elevated, the economy must adjust through some combination of reserve use, higher borrowing, slower domestic demand, or peso depreciation.

Structural improvements—stronger exports, higher productivity, tourism gains, or investment reforms—remain possible but operate over much longer horizons and depend on institutional capacity that rarely adjusts quickly during external stress.

In practice, short-term adjustment increasingly defaults to financial channels: peso weakness, reserve use, and borrowing.

Structural rebalancing, where it occurs, tends to arrive later—politically slower, institutionally harder, and far less responsive to immediate shocks.

Nonetheless, the government face a choice: let markets resolve imbalances, or intervene and pay a heavier price—crisis.

IX. ASEAN’s Oil Shock Politics: Singapore-Indonesia’s Divergence

Figure 5

Singapore’s stock market benchmark, the STI, recently overtook Indonesia’s Jakarta Stock Exchange as the largest in ASEAN. (Figure 5, upper diagram)

Why this is important?

The Singapore–Indonesia divergence offers a regional case study in oil-shock politics. Both faced imported inflation, energy pressures, and tighter global liquidity. Yet markets rewarded institutional credibility and financial absorption while penalizing administrative intervention.

Despite the oil shock, the USD has barely risen against the Singapore dollar. That’s because Singapore absorbed stress through liquidity, strong banks, and institutional inflows, allowing relative SGD stability and rising equity valuations. (Figure 5 lower image)

Meanwhile the rupiah (IDR) is at record lows. Indonesian authorities increasingly relied on political interventions: FX restrictions, export controls, and administrative management as the rupiah weakened, with markets eventually forcing the discussion toward rate hikes via rising sovereign yields.

So no, the sufferings from the oil shock are not equal.

X. When Bond Markets Revolt: The BSP’s Off-Cycle Contradiction—a Panicked Response

If the Philippines’ external imbalance explains the pressure on the peso, Treasury markets increasingly explain the pressure on the BSP.

Figure 6

The continuing rout in government securities may be revealing something policymakers hesitate to acknowledge publicly: inflation is no longer behaving like a temporary supply disturbance.

Treasury yields have surged across key segments of the curve, particularly the belly, increasingly signaling that markets are repricing inflation persistence, peso vulnerability, sovereign financing needs, and policy credibility risks simultaneously. Belly yields continue to soar past 2022 highs. (Figure 6, topmost and middle charts)

In effect, financial markets have already been tightening conditions ahead of the BSP.

That creates an uncomfortable contradiction.

The BSP continues emphasizing supply-side inflation: oil, food, logistics disruptions, and geopolitical shocks from the Middle East conflict.

Suddenly, policymakers signaled a willingness to consider an off‑cycle rate hike, prompted by the Treasury market rout. The BSP chief, ironically, admitted they were “behind the curve” and telegraphed a possible “surprise” move to cool inflation, according to one headline.

If inflation is merely exogenous and supply-driven, why tighten?

Interest rates do not produce oil.

They do not reduce shipping costs.

They do not rebuild disrupted supply chains.

The BSP itself previously argued that monetary policy has limited effectiveness against supply-side inflation.

So why the shift?

The answer increasingly lies beneath the official narrative.

Figure 7

Persistent supply shocks become generalized inflation when transmitted primarily through liquidity (credit expansion), then exchange rates and fiscal spillovers—all of which are entwined. M2 has recently been rising ahead of the oil shock (Figure 7, topmost visual)

The Philippines has deepened its dependence on inflationary liquidity expansion to drive GDP performance, which ironically has coincided with its slowdown. (Figure 7, middle diagram)

A weakening peso magnifies imported inflation. Rising Treasury yields tighten financing conditions. Elevated leverage makes the system increasingly sensitive to refinancing costs and credit risk.

This no longer appears to be merely an oil story. It increasingly resembles a balance‑sheet story. And markets may already be forcing the BSP to acknowledge it.

Central banks rarely operate independently of bond markets. Credibility is not only partly outsourced to pricing but also reflects the credit health of government bonds and monetary policies.

Once investors begin demanding higher yields to compensate for inflation, currency weakness, and fiscal risk, policymakers grow even more reliant on markets for guidance. Of course, they never admit to this.

The dilemma becomes severe in a leveraged economy.

Banks remain large holders of government securities.

Corporates entered 2026 heavily financed.

Government borrowing requirements remain elevated.

Tightening risks exposing duration mismatches, refinancing pressures, and weaker cash flows precisely as growth slows.

Delay, however, risks a more destabilizing outcome: markets concluding the BSP has fallen behind the curve.

This is the trap.

The BSP now faces a “devil and the deep blue sea” dilemma — tighten into fragility, or allow fragility to spill into inflation expectations, peso weakness, and Treasury pricing.

Neither path appears painless.

XI. Inflation Did Not Disappear: Huge Expansion in Pork Import Quotas, DTI’s Some Prices May Rise

If the BSP increasingly tolerates peso weakness near the 63.5 zone, policymakers face an immediate political problem:

How do you contain inflation without confronting the underlying external imbalance?

The answer increasingly appears skewed toward administrative interventions and short‑term political populist fixes.

Imports.
Price assurances.
Emergency interventions.
And selective suppression.

The administration’s dramatic increase in pork Minimum Access Volume (MAV)—from 54,210 metric tons to 204,210 metric tons, an additional 150,000 metric tons—offers a revealing case study.

Officially, the move aims to stabilize pork prices amid lingering disruptions from African Swine Fever (ASF). Yet the scale of the increase suggests something larger than routine agricultural management. Authorities had already attempted pork MSRP controls (March 2025), only to retreat after poor compliance and market resistance (May 2025). Direct price suppression failed. The fallback increasingly appears imported disinflation.

The timing matters.

Despite lingering deflation in meat CPI in the first four months of 2026, policymakers still opted for a massive quota increase. (Figure 7, lower image)

The magnitude suggests authorities are preparing for a material domestic supply shortfall—or are increasingly concerned one is emerging amid ASF disruptions, rising feed and fuel costs, weather pressures, and second-round oil shock effects.

But imported disinflation is not free.

Every additional ton of pork requires dollars.

And dollars increasingly appear scarce.

In an economy already confronting widening BoP deficits, rising oil import costs, slowing growth, and peso pressure, suppressing food inflation through imports risks simply relocating inflation pressure from supermarket shelves to the foreign exchange market.

Today’s relatively ‘cheaper’ pork may become tomorrow’s weaker peso.

And a weaker peso eventually feeds back into domestic prices through imported fuel, fertilizer, feed, logistics, and food inputs. The risk increasingly resembles a vicious cycle:

Import to suppress inflation → widen FX demand → weaken peso → import inflation returns → import even more to suppress prices.

The next question is: who benefits from such an outsized, politically determined import allocation and its related activities? One thing is clear: we can expect protests from local swine producers.

The same contradiction increasingly appears in the DTI’s repeated assurance of “no price hikes” for basic goods.

Manufacturers temporarily pledged restraint despite rising fuel and logistics costs from the Middle East oil shock. Yet headline CPI accelerated sharply from 4.1% in March to 7.2% in April.

The disconnect matters.

If inflation accelerated despite a proclaimed freeze in necessities, then costs likely adjusted elsewhere: transport, utilities, shrinkflation, skimpflation, supply-chain pass-through, informal markets, and unmonitored essentials.

Inflation did not disappear.

It rerouted.

This is the deeper problem with administrative inflation management.

Temporary freezes may delay pass-through, but they cannot repeal the economic imbalance between supply pressures (via rising input costs) and demand.

When governments suppress price signals while cost structures worsen, inflation becomes compressed rather than solved or shortages surface.

Regulated low prices may occur, but long lines via rationing is the alternative.

That said, eventually, repricing returns or the law of economics prevail.

Often more abruptly.

The DTI’s subsequent admission that some prices may rise suggests the deferred adjustment phase may already be arriving.

Meanwhile, Treasury yields may be offering the more honest signal.

Bond markets increasingly appear to be pricing not temporary inflation noise, but the persistence of stagflationary pressures and the revelation of imbalances from years of policy distortions.

XII. Conclusion: Stagflation as Process, Not Event

The central mistake in today’s debate is treating stagflation as an event waiting for official confirmation.

Historically, it rarely arrives all at once.

It emerges as a process.

First through weakening purchasing power.

Then through slower real activity hidden beneath nominal resilience.

Then through external imbalances, rising financing stress, currency pressure, and increasingly interventionist policy responses designed to suppress visible symptoms rather than address underlying causes.

The Philippines increasingly appears to be moving along precisely such a trajectory. Yet, these are symptoms.

The recent oil shock did not create these conditions.

It accelerated them.

The underlying fragility had already been accumulating through widening savings-investment imbalances, leverage dependence, external deficits, weakening productive signals, and policy structures increasingly oriented toward politically managing outcomes rather than confronting constraints through market forces.

The irony is increasingly difficult to ignore.

The more authorities suppress price signals, smooth volatility, and delay adjustment, the more hidden pressures appear to migrate elsewhere—into Treasury yields, the peso, reserve buffers, household balance sheets, and eventually social conditions themselves.

Stagflation rarely announces itself in a single statistic.

Usually, households experience it first.

Markets recognize it second.

The data arrives later.

Increasingly, that sequencing no longer appears theoretical.

It appears observable.

___

References (our stagflation series)

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

Seed Article

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

noreply@blogger.com (Unknown) — Sun, 17 May 2026 04:45:09 +0000

Central bankers always try to avoid their last big mistake. So every time there's the threat of a contraction in the economy, they'll over stimulate the economy, by printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one—Milton Friedman

In this issue:

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

I. Introduction: Markets Are Repricing the Stagflation Regime

II. Sovereign Repricing Is Becoming a Banking Problem

III. The Liquidity Boom Concealed Structural Fragility

IV. March 2026: Hidden Cost of Relief Measures

V. Bank Liquidity Improved—But Mainly Through Deposit Expansion

VI. The Wile E. Coyote’s Denominator Effect

VII. Sovereign Absorption, AFS Portfolios, and Hidden Duration Stress

VIII. Reflexivity: When Accommodation Starts Feeding Instability

IX. The Savings-Investment Gap: From Development Narrative to Stagflationary Dependence

X. Why the Oil Shock Broke Mainstream Models

XI. The Banking Contradiction: Why System Normalization Is a Mirage

XII. Conclusion: Accommodation Without Resolution Redux

Stagflation Part 6: The Banking System Under Siege—Bond Selloffs, Liquidity Illusions, and the Coming Balance Sheet Reckoning

How inflation, sovereign dependence, and financial repression are turning banks into the shock absorbers of a stagflationary regime.

I. Introduction: Markets Are Repricing the Stagflation Regime

On Friday, May 15, 2026, the USDPHP closed at a record 61.721—another historic low for the peso and its 16th record high of the year. Every prior “comfort level” for the currency has effectively been erased. The peso is now among Asia’s worst-performing currencies year-to-date.

Yet the peso’s decline may not even be the most important market signal.

Figure 1

Far more consequential is the ongoing repricing inside the domestic bond market. BVAL Treasury yields—particularly at the belly of the curve—have surged beyond prior cycle highs, while longer-dated maturities are rapidly approaching 2022 stress levels (Figure 1)

The move no longer resembles a temporary inflation scare or speculative overshoot. Markets are increasingly repricing sovereign, inflation, and currency risk simultaneously.

The distinction matters.

Peso weakness reflects external imbalance. But rising bond yields directly strike the balance sheets of the Philippine banking system.

Banks sit at the center of the country’s macro-financial structure. Backstopped by the BSP, they financed the pandemic rescue cycle, intermediated the post-pandemic liquidity surge, absorbed expanding government debt issuance, and enabled credit expansion into politically favored sectors. In the process, banks became increasingly exposed to the very distortions created by the policies that artificially sustained nominal growth.

Mainstream narratives continue to describe the banking system as “well-capitalized,” “liquid,” and “resilient.” But these are largely backward-looking accounting conditions rather than forward-looking assessments of systemic vulnerability.

The issue is not whether banks currently satisfy regulatory ratios. The issue is the sustainability of a macro-financial structure that has become increasingly dependent on continual liquidity accommodation, regulatory forbearance, and suppressed volatility to prevent the emergence of deeper systemic stress.

That is the deeper significance of stagflation.

Stagflation is not merely the coexistence of inflation and slowing growth. It is the progressive collision between inflation persistence, fiscal dependence, external fragility, and financial leverage.

And in the Philippines, those pressures are increasingly converging on the banking system.

II. Sovereign Repricing Is Becoming a Banking Problem

Much of the recent discussion surrounding Philippine market turbulence has focused on USDPHP. But the more consequential development may be occurring inside the domestic bond market.

The scale of the Philippine bond selloff is not background noise. It is the primary transmission mechanism through which macroeconomic stress migrates into bank balance sheets.

Figure 2

Philippine Treasury securities have been among Asia’s worst-performing bonds in 2026 following the Iran War, with Philippine 10-year yields rising the most among ASEAN bonds. (Figure 2, top and middle windows)

Ironically, this deterioration has unfolded even as the Philippines prepares for inclusion in the JP Morgan Emerging Market Debt Index in January 2027. Would JPMorgan issue a downgrade?

The significance of the selloff is frequently misunderstood.

For banks, rising yields are not merely inconvenient market fluctuations. Higher yields translate directly into mark-to-market losses, duration stress, weaker securities valuations, and tighter liquidity conditions.

This matters because Philippine banks substantially increased exposure to government securities beginning in 2015, with the trend accelerating during the pandemic era. Banks’ net claims on the central government (NCoCG) rose, alongside public debt hitting all-time highs last March with NCoCG at PHP 6.258 trillion accounting for 33% of the PHP 18.488 trillion public debt. (Figure 2, lowest image)

The pandemic response institutionalized a regime in which:

fiscal deficits exploded,
BSP liquidity injections surged,
banks absorbed massive sovereign issuance,
and government debt became increasingly embedded as collateral throughout the financial system.

That framework functioned as long as:

inflation remained politically manageable,
the peso avoided disorderly depreciation,
and yields stayed artificially suppressed.

Stagflation changes the equation.

Persistent inflation forces markets to demand higher nominal yields. External fragility pressures the currency. Fiscal dependence requires continual debt issuance even as government borrowing increasingly crowds out private credit formation. Every upward move in yields simultaneously erodes the market value of existing bond holdings.

This is why the present environment matters.

The repricing is occurring precisely when:
public debt remains elevated,
fiscal deficits remain structurally wide,
external financing conditions are tightening,
and growth quality is deteriorating.

In effect, banks are becoming trapped between sovereign financing dependence and market repricing.

The system cannot easily tolerate market-clearing yields because the fiscal structure, banking system, and asset markets have all become deeply dependent on suppressed financing costs.

Yet suppressing yields amid inflation and peso weakness merely transfers pressure into currency depreciation, financial repression, and deeper balance-sheet distortions.

This is the core contradiction of financial repression.

The state increasingly depends on banks to intermediate expanding sovereign debt burdens even as inflation and currency weakness steadily erode the real foundations supporting those balance sheets.

III. The Liquidity Boom Concealed Structural Fragility

The banking pressures now emerging did not appear spontaneously. They were incubated even before the post-pandemic liquidity cycle.

For years, policymakers and mainstream economists treated liquidity expansion as a stabilizing force. Rapid M2 and M3 growth were interpreted as signs of recovery, resilience, and normalization.

Figure 3

Credit (domestic claims) and liquidity (M2) expansion as a share of GDP have been rising since 2011, accelerated in pre-pandemic 2019, and have since reached key milestones. The GDP’s ever-deepening dependence underscores bank-led financialization, even as the GDP rate continues downward path. (Figure 3, topmost pane)

But liquidity creation is NEVER neutral.

The critical issue is not simply the quantity of money creation, but where newly created liquidity enters the system first and how credit allocation is shaped by political and institutional incentives.

In classic Cantillon effect-fashion, the earliest beneficiaries of post-pandemic liquidity expansion were sectors closest to BSP’s sovereign financing and bank credit intermediation—the primary sources of money creation.

Liquidity increasingly flowed into:

government financing,
real estate carry structures,
politically connected infrastructure,
speculative financial activities,
electricity and utility-related lending,
and consumer leverage amplified by credit card rate caps.

As a result, credit card lending surged even as household purchasing power weakened.

Electricity and utility-related lending climbed sharply since 2024 despite deteriorating GDP. (Figure 3, middle graph)

Consumer finance became one of the banking system’s primary growth engines since the pandemic even as real wage pressures intensified. (Figure 3, lowest diagram)

This created the appearance of nominal resilience.

But much of the expansion reflected liquidity recycling rather than productivity-driven growth. The banking system increasingly functioned as a transmission mechanism for sustaining aggregate demand despite weakening real income conditions.

That distinction is critical.

When economies rely on debt expansion to preserve consumption amid deteriorating purchasing power, balance sheets gradually become more fragile beneath the surface.

Stagflation magnifies this process because inflation compresses household cash flows while slowing real activity weakens repayment capacity.

Banks may initially report:

strong nominal loan growth,
healthy net interest margins,
and stable headline balance-sheet conditions.

But over time, the quality of that growth deteriorates.

The result is a system where:

nominal lending remains elevated,
asset prices become increasingly policy-dependent,
and underlying credit quality quietly weakens beneath the surface.

This is why banking stress under stagflation is often delayed rather than immediate.

Liquidity masks fragility for awhile.

Then inflation, higher yields, and slowing real activity begin to expose it.

IV. March 2026: Hidden Cost of Relief Measures

The BSP’s April 2026 regulatory and loan relief measures—officially framed as emergency support for the oil shock—should not be interpreted as neutral policy tools.

Relief regimes redistribute risk asymmetrically.

Large banks, politically connected borrowers, and institutions with privileged regulatory access typically receive greater flexibility, balance-sheet protection, and time than smaller firms or ordinary households. In that sense, crisis accommodation functions not merely as stabilization policy, but as a mechanism that risks deepening moral hazard and reinforcing regulatory capture.

This institutional structure matters because the BSP’s policymaking apparatus remains deeply intertwined with the banking establishment itself, populated largely by former executives from major domestic banks and multinational financial institutions.

The issue is not necessarily conspiracy, but institutional incentive alignment: policymakers shaped by the same financial architecture they supervise will naturally tend to prioritize preservation of that structure. Experience and familiarity shapes incentives. Networks shape policy reflexes. Politically connected interest groups also shape policy trajectories.

Against that backdrop, March 2026 marked the transition phase before the formal implementation of April’s relief measures.

Echoing aspects of the pandemic playbook, banks were likely already repositioning balance sheets in anticipation of regulatory flexibility, liquidity support, prudential accommodation, and accounting relief.

V. Bank Liquidity Improved—But Mainly Through Deposit Expansion

March banking data showed a modest improvement in headline liquidity conditions, though the rebound was driven primarily by deposit expansion rather than internally generated balance-sheet strengthening.

Figure 4

Cash and due from banks posted their first expansion since August 2024, lifting the cash-to-deposit ratio marginally from February’s record lows. Yet despite the rebound, liquidity buffers remained historically thin. (Figure 4, topmost image)

The apparent improvement largely reflected accelerating deposit growth.

Peso and FX deposits both strengthened during Q1, consistent with the sharp rebound in M2 and M3 liquidity growth. BSP accommodation had likely already begun filtering through the banking system even before the formal April relief package. (Figure 4, middle visual)

Yet beneath the headline stabilization, underlying liquidity conditions remained fragile.

Liquid assets-to-deposits continued drifting downward toward pre-rescue March 2020 levels, suggesting banks were still operating with structurally compressed liquidity cushions despite years of extraordinary accommodation.

The apparent stabilization therefore reflected funding inflows more than genuine liquidity resilience.

That distinction matters because stagflation eventually tests liquidity quality—not merely liquidity quantity.

VI. The Wile E. Coyote’s Denominator Effect

March banking data appeared superficially stable.

Headline nonperforming loan (NPL) ratios remained broadly steady. But this stability increasingly resembles what we have repeatedly described as the banking system’s Wile E. Coyote denominator effect—where deteriorating fundamentals become statistically obscured by rapid balance-sheet expansion. (Figure 4, lowest chart)

Gross nonperforming loans climbed to fresh record nominal highs in March or bad loans continued rising.

Denominator growth simply outran visible recognition or rapid Total Loan Portfolio (TLP) expansion temporarily compressed headline NPL ratios, masking the deterioration emerging underneath the surface.

Stable ratios can therefore conceal worsening underlying conditions.

The same pattern increasingly appeared in loan-loss provisioning.

Figure 5

Allowance for credit losses rose to near-record levels. At first glance, this appeared reassuring—a sign of prudence and reserve accumulation. (Figure 5, topmost chart)

But once again, denominator growth mattered.

Provisioning growth lagged behind TLP expansion, causing reserve ratios to soften despite intensifying macroeconomic stress.

This raises an increasingly uncomfortable question:

Are provisions genuinely strengthening resilience, or merely struggling to keep pace with an increasingly leveraged and slowing credit structure?

Under normal expansionary conditions, rapid credit growth can dilute emerging stress and stabilize reported metrics.

But stagflation changes the equation.

If slowing growth weakens repayment capacity while inflation compresses household cash flow, denominator support itself begins to weaken.

That is when the Wile E. Coyote effect comes into play. It exposes the statistical artifice hidden behind the headline numbers. What once appeared statistically stable deteriorates rapidly once loan growth slows and hidden losses become harder to dilute.

Like Wile E. Coyote, once he realizes he has run far past the cliff, gravity takes hold.

VII. Sovereign Absorption, AFS Portfolios, and Hidden Duration Stress

The sovereign absorption trade also intensified.

Banks continued aggressively accumulating government-linked assets, reinforcing the increasingly symbiotic relationship between fiscal deficits and bank balance sheets.

Held-to-Maturity (HTM) securities presently reclassified as “Debt Securities- Net of Amortization” climbed to record highs, reflecting continued sovereign intermediation. HTMs accounted for 67% of NCoCG. (Figure 5, middle chart)

At the same time, Available-for-Sale (AFS) portfolios surged sharply. (Figure 5, lowest diagram)

On paper, rising securities holdings appear consistent with liquidity strength.

Under stagflation, however, they increasingly become a source of vulnerability.

The recent repricing in Philippine Treasury yields—particularly at the belly of the curve—directly pressures AFS portfolios through mark-to-market losses.

This creates a predictable institutional response.

Banks increasingly face incentives to migrate securities toward HTM classification, where unrealized market losses avoid immediate recognition.

But this merely alters accounting treatment.

It does not eliminate duration risk.

HTM migration may suppress accounting volatility, but it also reduces balance-sheet flexibility by locking assets into longer-duration structures that become less liquid under stress.

In effect, banks increasingly face a tradeoff between accounting stability and actual balance-sheet resilience.

Signs of strain are already beginning to emerge beneath headline stability.

Figure 6

Banking sector’s income growth remained near stagnation in Q1 2026, rising only 2.86%, as accumulated market losses continued suppressing profitability. Financial market-related losses remained elevated at roughly Php 43.5 billion—persistently sustained since Q2 2025 and approaching pandemic-era stress peak levels recorded in Q4 2020. (Figure 6, topmost pane)

At the same time, balance-sheet pressures intensified. Despite record investment holdings, accumulated foreign exchange and fixed-income valuation losses surged toward Php 120 billion in March, revisiting conditions last seen during the December 2022 repricing cycle. Valuation losses have accompanied the spike in 10-year yields. (Figure 6, middle chart)

At the same time, dependence on wholesale funding continued rising, with bank borrowings reaching fresh record highs in March. (Figure 6, lowest graph)

These developments matter because they suggest the banking system entered the oil-shock phase already carrying unresolved vulnerabilities—even before the full effects of stagflation have emerged.

VIII. Reflexivity: When Accommodation Starts Feeding Instability

The deeper problem is that banking conditions are becoming increasingly reflexive.

BSP accommodation boosts liquidity.
Banks expand nominal credit.
Credit growth reinforces inflation persistence.
Inflation pressures bond yields higher.
Higher yields weaken securities portfolios.

Banks then become increasingly dependent on regulatory relief, accounting migration, and additional liquidity support to preserve stability.

Authorities subsequently face pressure to deliver even more accommodation to prevent broader financial stress.

Rather than resolving fragility, accommodation increasingly delays recognition while compounding the imbalances generating the stress itself.

This is why March 2026 matters.

The banking system did not enter the oil-shock phase from a position of clear strength.

It entered with:

thin liquidity cushions,
rising sovereign exposure,
growing duration risk,
weakening profitability quality,
and balance sheets increasingly dependent on denominator growth to suppress visible deterioration.

In that sense, the BSP’s April relief measures do not represent resolution.

They may instead buy time at the cost of deeper sovereign dependence, greater balance-sheet distortion, and the continued accumulation of unresolved imbalances.

What emerges is not crisis resolution, but the institutionalization of permanent accommodation as the operating framework of the financial system.

IX. The Savings-Investment Gap: From Development Narrative to Stagflationary Dependence

Figure 7

One of the least discussed yet the most critical indicator of the Philippine economy’s underlying fragility resurfaced in Q1 2026: the savings-investment (S-I) gap widened to Php 1.03 trillion, the largest in two years. (Figure 7, upper image)

At first glance, orthodox macroeconomic interpretation treats this as manageable—even desirable.

Weak private demand supposedly justifies larger public spending to sustain GDP growth.

Under this framework, government borrowing and expenditure become stabilizing tools: when households retrench and private firms hesitate, the state steps in as spender, borrower, allocator, and increasingly, guarantor of aggregate demand.

But this framing obscure deeper structural problems.

The S-I gap’s weakness as a framework begins with the fact that it is fundamentally an accounting identity:

savings minus investment equals the current account balance.

But accounting identities explain what balances, not whether the underlying structure generating those balances is sustainable.

A widening S-I gap signals that domestic savings are increasingly insufficient to internally finance the economy’s investment requirements.

That gap must be financed somehow:

domestic borrowing,
foreign borrowing,
monetary accommodation,
or inflationary erosion of purchasing power.

In practice, the Philippines has increasingly relied on all four.

Yet even the accounting itself deserves scrutiny.

GDP-based national income statistics classify government construction and public expenditures as “investment” regardless of whether such projects satisfy market tests of profitability, cash-flow viability, or sustainable demand.

Unlike private capital formation—disciplined by profit and loss—politically allocated spending often survives through taxation, subsidies, refinancing, regulatory privilege, or continued deficit support.

That distinction matters.

The deeper issue is not merely that investment exceeds savings.

The issue is whether debt-financed and liquidity-supported investment generates sufficient productive capacity to repay the claims being created today.

If not, the system gradually becomes dependent on:

continual debt issuance,
BSP accommodation,
financial repression,
inflation leakage,
and sustained regulatory interventions

simply to maintain nominal growth.

This is where the government debt story becomes inseparable from the S-I gap.

The Philippines increasingly appears trapped in a feedback loop where weak domestic savings require greater dependence on debt expansion, while debt-financed growth itself weakens incentives for genuine savings formation.

Public debt may still appear manageable relative to advanced economies.

But such comparisons are misleading.

The issue is not merely debt-to-GDP ratios. Q1 debt/GDP hit 65.2%—a 21 year high, although the Palace did raise their supposed ceiling/ debt metric to 70% last year. (Figure 7, lower graph)

The issue is whether the economy possesses a sufficiently productive and self-sustaining capital structure capable of carrying rising debt burdens without continual intervention.

Much of recent growth has increasingly depended on:

public spending,
sovereign borrowing,
liquidity expansion,
credit-financed speculation and capital misallocation,
and consumption smoothing through leverage.

Banks increasingly sit at the center of this arrangement.

As fiscal financing requirements expand, financial institutions absorb rising sovereign issuance, redirecting balance sheets toward government exposure. Domestic savings that might otherwise finance entrepreneurial activity and decentralized capital formation increasingly fund deficit spending instead.

This is the sovereign-bank nexus.

The more the state depends on debt expansion, the more banks become intertwined with fiscal sustainability itself.

The result is not necessarily immediate displacement, but gradual crowding out through balance-sheet absorption. Capital increasingly flows toward politically backed financing channels rather than decentralized entrepreneurial allocation. Over time, this dynamic contributes to rising funding costs, weaker private-sector dynamism, and greater systemic dependence on policy support.

This dynamic helps explain the coexistence of:

slowing real growth,
persistent inflation pressures,
weakening household balance sheets,
deteriorating external accounts,
peso weakness,
and repeated liquidity accommodation.

The S-I gap therefore becomes more than a macroeconomic statistic.

It represents a blueprint of the political economy’s development structure itself.

The widening imbalance reflects an institutional preference for:

demand management over productivity reform,
centralized allocation over decentralized capital formation,
and short-term GDP optics over long-term savings formation.

Under stagflationary conditions, these dependencies become progressively harder to sustain without some combination of:

higher inflation,
deeper financial repression,
currency weakness,
slower real growth,
or escalating policy interventions.

The irony is difficult to ignore.

Policies justified as temporary stimulus to compensate for private-sector weakness may gradually become one of the mechanisms entrenching that weakness in the first place.

X. Why the Oil Shock Broke Mainstream Models

The recent Iran War oil shock exposed more than a forecasting error. It revealed a deeper epistemological problem embedded in mainstream macroeconomics—and the fragility of the broader economic structure underlying its models.

Consensus inflation forecasts largely treated price pressures as transitory and primarily supply-driven. Yet econometric models depend on assumptions of relatively stable relationships between variables derived from past statistical regularities. Under asymmetric policy intervention, regime shifts, and politically conditioned responses, however, the sequence and transmission of economic effects become nonlinear and unstable.

Here, Hayek’s knowledge problem resurfaces. Dispersed human adaptation cannot be compressed into static coefficients without losing critical information. Households, firms, banks, and investors continuously adjust behavior in response to policy signals, financing stress, and deteriorating expectations. Besides, aggregates don’t capture individual utilities.

Once BSP and government intervention themselves became dominant market variables—through FX defense, liquidity management, subsidies, emergency powers, and CPI-conditioned signaling—the system became increasingly reflexive. Forecasts influenced behavior, behavior altered transmission channels, and the assumptions underlying the forecasts deteriorated in real time.

This is also where Goodhart’s Law becomes relevant. Once CPI evolved into a political metric of credibility, policies increasingly targeted the appearance of price stability while structural imbalances accumulated elsewhere in the system. Statistical stability increasingly masked mounting financial and economic fragility.

The recent oil shock exposed how vulnerable this framework had become.

Higher oil and electricity costs did not merely raise transport expenses.

They cascaded throughout the economy by:

weakening household cash flow,
compressing corporate margins,
increasing dependence on consumer credit,
and intensifying financing stress across sectors.

Policymakers increasingly responded through:

subsidies,
price suppression,
emergency powers,
regulatory accommodation,
and politically mediated financing mechanisms.

But intervention does not eliminate scarcity or losses.

It merely redistributes them across balance sheets.

And much of that redistribution increasingly lands on:

banks,
consumers,
currency markets,
and sovereign financing channels.

This is why the EO-110 framework matters beyond energy policy.

Once emergency intervention becomes normalized, financial systems gradually evolve toward permanent crisis management layered on top of earlier pandemic-era accommodation.

Banks then cease functioning purely as market intermediaries.

They increasingly become quasi-fiscal transmission mechanisms for stabilizing politically sensitive sectors and sustaining nominal demand.

If inflation forecasting failed because intervention distorted price signals and altered transmission mechanisms, then the same critique increasingly applies to GDP interpretation itself.

Again, macroeconomic models rely on assumptions of relatively stable relationships, functioning price signals, and coherent feedback mechanisms. But once policy intervention persistently reshapes incentives, suppresses market adjustments, and redirects capital flows, aggregate output statistics become progressively less reflective of underlying productive conditions.

GDP then risks evolving from supposedly a “neutral and objective” measure of economic activity into a politically conditioned artifact of intervention-driven stabilization.

XI. The Banking Contradiction: Why System Normalization Is a Mirage

The contradiction facing the Philippine banking system is no longer merely financial.

It is increasingly political, institutional, and macroeconomic.

After years of liquidity support, sovereign absorption, and intervention-driven stabilization, policymakers increasingly face objectives that are difficult to reconcile simultaneously.

Authorities want:

growth without recession,
lower inflation without adjustment costs,
currency stability without external rebalancing,
rising public spending without disorderly debt repricing,
and a resilient banking system without materially tighter financial conditions.

But these objectives increasingly conflict.

Containing inflation requires tighter liquidity conditions.

Yet tighter liquidity risks slowing credit growth, exposing weaker borrowers, and amplifying stress in already leveraged sectors.

Allowing yields to rise restores market pricing.

But higher yields increase government financing costs while simultaneously eroding the value of bank-held sovereign securities.

Supporting the peso may stabilize inflation expectations.

But it also tightens financial conditions in an economy already dependent on credit expansion.

Meanwhile, renewed liquidity accommodation preserves short-term stability but reinforces inflation persistence and sovereign dependence.

The complexity of the feedback loops escalates.

This is the banking contradiction of stagflation:

the policy required to resolve one imbalance increasingly intensifies another.

The Philippine banking system sits at the center of these tensions because it has become deeply embedded in:

sovereign financing,
household leverage,
liquidity transmission,
and policy stabilization itself.

This is what distinguishes the current environment from a conventional credit cycle.

In normal downturns, banks primarily absorb credit losses.

Under stagflation, banks become transmission mechanisms for multiple overlapping pressures:

inflation,
currency weakness,
fiscal dependence,
bond repricing,
and slowing real activity.

The result is not necessarily immediate instability.

The greater risk is policy paralysis driven by structural contradiction.

Authorities increasingly rely on path dependent responses:

selective tightening,
targeted relief,
expanded public spending,
liquidity support,
moral suasion,
shaping media narratives,
accounting flexibility,
and regulatory accommodation.

But hybrid regimes rarely resolve underlying imbalances.

They instead delay recognition while deepening structural dependence on future intervention.

This is why “normalization” becomes progressively more difficult.

The longer accommodation persists, the more balance sheets adapt to its presence. Imbalances accumulate. Risk becomes embedded in expectations. And even modest tightening can generate disproportionate stress.

That is the deeper trajectory of the current cycle.

The question is no longer whether the banking system appears stable today.

The question is whether it can reduce its dependence on a framework of continual accommodation, subsidy, and intervention—or whether that dependence eventually defines the limits of the system through disorderly adjustment.

XII. Conclusion: Accommodation Without Resolution Redux

The Philippine banking system is not facing an immediate crisis (yet).

Headline capitalization remains intact. Liquidity has stabilized temporarily. Regulatory ratios still signal resilience.

But stagflation rarely begins through sudden collapse.

More often, fragility accumulates gradually beneath the surface, exacerbating existing imbalances while policy intervention delays recognition.

This is increasingly the pattern now emerging.

Rising sovereign dependence, widening savings deficiencies, credit-financed malinvestments, peso weakness, bond-market repricing, and slowing real growth are converging on the same balance sheets policymakers increasingly rely upon to sustain stability.

The contradiction is difficult to escape.

Banks are expected to finance fiscal expansion, absorb duration risk, support credit growth, and remain resilient—all while inflation, external fragility, and political intervention steadily distort the price signals that normally discipline risk.

The danger is not merely weaker profitability or rising bad loans.

The greater risk is a system that becomes progressively dependent on continual accommodation simply to preserve the appearance of stability.

More concerning still is the INTENSIFYING POLITICIZATION of the industry as it is increasingly mobilized to serve the deepening financing needs of the state.

That is the deeper meaning of the current cycle.

The issue is no longer whether the banking system appears stable today.

The issue is whether the foundations sustaining that stability are becoming increasingly fragile beneath the surface.

The Philippine banking system may not yet be in crisis.

But it is increasingly operating under siege—and drifting toward one.

___

References

1 Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

2 Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

3 The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

4 Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

5 Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression

Seed Article:

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression

noreply@blogger.com (Unknown) — Sun, 10 May 2026 02:32:00 +0000

No country, not even the poorest, need to abandon the hope of sound currency conditions. It is not the poverty of individuals and the community, not indebtedness to foreign nations, not the unfavourableness of the conditions of production, that force up the rate of exchange, but inflation—Ludwig von Mises

In this issue:

Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression

I. The Late-Stage Cycle and the Deepening Stagflationary Transition

II. Fragile Trend Support: Momentum, Not Fundamentals

III. Why Q1 2026 2.8% GDP Is Weaker Than Advertised

IIIA. Consumption Weakness Beneath the Headline, Investment Recession

IIIB. Interventionism and the Politicization of Economic Activity

IIIC. When Statistics Lose Informational Quality

IIID. The Growing Divergence Between Statistics and Reality

IIIE. Capital Consumption Disguised as Growth

IV. The April 7.2% CPI Shock and the Risk of a GDP Downgrade Avalanche

V. Why Forecast Downgrades Matter

VI. Labor, Debt, GIR, and the Return of Financial Stress Signals

VIA. Labor Market Contradictions

VIB. Public Debt and the Sovereign Absorption Cycle

VIC. GIR Deterioration and External Balance-Sheet Pressure

VII. Yield Curves, Peso Relief Rallies, and the Illusion of Stability

VIII. Energy Politics, EPIRA Blame-Shifting, and the GEA-All Suspension

IX. Conclusion: Diminishing Returns: From Stabilization to Fragility

Stagflation Part 5: The Q1 2026 GDP Illusion and the Gathering Recession Risk Beneath Price Suppression

The visible GDP slowdown may still understate the deeper deterioration unfolding beneath intervention-driven stability

I. The Late-Stage Cycle and the Deepening Stagflationary Transition

The Philippine economy is increasingly exhibiting the classic symptoms of a late-stage business cycle characterized by deepening stagflation: slowing real activity, persistent inflationary pressures, rising fiscal dependence, deteriorating external buffers, and intensifying state intervention in price formation.

Importantly, this assessment still does not fully capture potential stress emerging within bank balance sheets and domestic credit channels, pending the BSP’s release of March banking-sector data.

Q1 2026 GDP growth of 2.8% was already weak relative to historical norms, especially for an economy conditioned for years on sustained deficit-financed stimulus, unprecedented liquidity accommodation, and emergency-era interventions. But the deeper issue is not simply that GDP growth has been slowing. Rather, the slowdown itself likely understates the extent of the underlying deterioration.

The widening gap between statistical outputs and lived economic conditions is becoming increasingly difficult to ignore. As governments intervene more aggressively in price formation—suppressing market-clearing mechanisms, pressuring suppliers, manipulating administered prices, and expanding fiscal absorption to preserve political stability—statistical aggregates themselves begin losing informational quality.

This is where the Philippine economy appears to be headed.

The danger is not merely stagnation.

The greater danger is a transition from inflationary stagnation into a broader balance-sheet recession dynamic, in which debt burdens, capital distortions, and weakening private-sector demand reinforce one another through a self-perpetuating negative feedback loop.

More importantly, this marks our fifth installment in a broader series examining how post-pandemic distortions, the current oil shock, structural inflationary pressures, and weakening real activity are converging into a stagflationary regime.

Our previous installments:

II. Fragile Trend Support: Momentum, Not Fundamentals

Figure 1

What many missed in the Q1 2026 GDP release is that the headline growth rate obscures the economy’s underlying momentum.

First, since peaking in Q2 2021 following the BSP’s historic rescue interventions, Philippine GDP (% YoY) has been on a descending trajectory, with the pace of deceleration intensifying in 2025—even before the corruption scandal and the present oil shock. (Figure 1, upper pane)

Second, the GDP print is heavily influenced by base effects. But peso-based NGDP and RGDP trend lines present a more fragile picture: both are now testing the secondary post-pandemic trend support that emerged after the 2020 recession. Q1 2026 marks the second attempted breach of that trajectory. (Figure 1, lower image)

This is less about long-run fundamentals than cyclical momentum. As long as NGDP and RGDP remain above trend support, authorities can still claim that the recovery path remains intact despite slowing growth. But a decisive breakdown would signal that nominal, peso-based activity itself is losing post-pandemic momentum—materially increasing recession risks.

With April’s 7.2% CPI oil shock pressuring Q2 conditions, the margin for error is narrowing.

III. Why Q1 2026 2.8% GDP Is Weaker Than Advertised

The headline problem with Q1 2026 GDP is not merely that growth slowed to 2.8%.

The deeper issue is that the underlying composition of growth increasingly reflects an economy being stabilized through state absorption, intervention, and statistical smoothing rather than broad-based private-sector expansion.

IIIA. Consumption Weakness Beneath the Headline, Investment Recession

Figure 2

Household final consumption expenditure (HFCE)—historically the economy’s primary growth engine—slowed sharply to 3.0%, its weakest pace since the 2021 recession period. Alone, this signals meaningful demand deterioration beneath the headline aggregate. (Figure 2, upper window)

Yet GDP itself decelerated far less than weakening consumption conditions would normally imply.

If consumers materially retrenched, what offset the slowdown?

Certainly not investment.

Gross capital formation remained in recession for a third consecutive quarter, dragged heavily by construction activity, which deteriorated from -0.2% in Q3 2025, to -9.2% in Q4, and another -4.5% in Q1 2026. Despite repeated narratives of recovery and the revival of infrastructure spending, the hard GDP data continues to reflect a weakening investment cycle.

Instead, much of the stabilization came from two areas.

The first was external trade. Exports of goods and services rose 7.8%, while imports expanded 6.1%. But even here, contradictions emerged. Manufacturing GDP barely grew by 0.5% despite the export rebound, suggesting that trade gains may have reflected narrow sector concentration, inventory adjustments, pricing effects, or import-dependent activity rather than broad-based industrial strengthening. Ironically, such divergence have occurred throughout 2025 to the present (Figure 2, middle diagram)

The second—and likely more consequential—support came from government spending.

Government final consumption expenditure (GFCE) accelerated from just 0.7% in Q4 2025 to 4.8% in Q1 2026, coinciding with one of the largest first-quarter fiscal deficits on record. (Figure 2, lowest chart)

In effect, deficit-financed state demand increasingly substituted for weakening household consumption and contracting private investment.

Figure 3

This has gradually evolved into a structural pattern. Since roughly 2012, GFCE has persistently outperformed HFCE, steadily expanding the relative role of the state within GDP even as household-led growth weakened underneath. (Figure 3, topmost visual)

This is the crowding-out effect unfolding in real time: systemic government absorption of financing, liquidity, and productive resources increasingly displaces organic private-sector expansion.

IIIB. Interventionism and the Politicization of Economic Activity

At the same time, another process appears to be intensifying beneath the surface: the growing politicization and bureaucratization of economic activity through intervention and administrative suppression designed to contain visible inflation pressures.

Businesses increasingly operate under a dense web of controls, compliance burdens, ad hoc directives, and politically motivated interventions that raise operating costs, bias the system toward larger incumbents, suppress smaller competitors, and deepen opportunities for rent-seeking and corruption.

Importantly, inflationary pressures were already rebuilding well before the April 2026 oil shock. CPI bottomed in July 2025 alongside an interim trough in the USD/PHP exchange rate before reaccelerating around December, coinciding with renewed liquidity expansion, peso weakness, and worsening supply-side pressures. (Figure 3, middle image)

The April 7.2% CPI surge did not create these imbalances so much as expose and ventilate pressures already embedded within the system. The subsequent record highs in the USD/PHP further reflected the growing monetary and external maladjustments accumulating underneath the surface.

Authorities subsequently intensified emergency interventions measures through:

fare controls,
electricity adjustment suspensions,
coordinated fuel rollback pressure,
DTI price caps,
supplier warnings and enforcement crackdowns,
and broader political management of sensitive prices.

IIIC. When Statistics Lose Informational Quality

This matters because GDP calculations rely heavily on price deflators (implicit price index).

But the issue is not necessarily that authorities are mechanically inflating GDP statistics through outright fabrication.

Rather, interventions increasingly distort price transmission, suppresses market-clearing signals, and degrades informational quality across the system.

Moreover, government statistics themselves face no independent institutional audit despite their political sensitivity, creating incentives for selective presentation, optimistic framing, and statistical smoothing favorable to incumbent policy narratives.

Visible CPI pressures may therefore appear temporarily moderated, but the underlying stresses do not disappear. They migrate elsewhere:

into shrinking business margins,
deferred investment,
deteriorating service quality,
rising subsidy burdens,
inventory distortions,
widening external imbalances,
and increasingly fragile private-sector balance sheets.

As Ludwig von Mises argued in his framework on interventionism, partial interventions distort market signals and generate secondary distortions that eventually require further intervention. Once price formation becomes politicized, economic statistics themselves begin losing informational reliability because prices no longer fully reflect underlying scarcity and demand conditions.

IIID. The Growing Divergence Between Statistics and Reality

This divergence now appears increasingly visible across Philippine macroeconomic data.

Despite visible tourism weakness in areas such as Boracay, Baguio, Hundred Islands, and parts of Eastern Visayas, accommodation and food-service GDP still expanded by 4.0%.

While segment of the agricultural sector faced severe wastage problems and fishing paralysis across several regions, yet agriculture GDP contracted only marginally by -0.2%.

Several transport operators reduced or suspended operations amid mounting fuel pressures and deteriorating profitability, yet transport GDP still grew by 4.4%.

Meanwhile, March employment reportedly bounced despite weakening business conditions and a deteriorating investment environment.

These contradictions do not automatically imply statistical fabrication.

But they do suggest that aggregate statistics may increasingly be capturing nominal activity flows while failing to reflect the deteriorating quality, sustainability, and productive depth of underlying economic conditions.

This may also reflect the growing politicization in the construction of economic statistics and the narratives built around them, as authorities seek to preserve confidence amid rising public frustration over inflation and weakening economic conditions

In short, official statistics appear increasingly detached from grassroots economic reality.

A rise in employment during weakening conditions may simply reflect labor downgrading: workers shifting into lower-productivity survival activities rather than genuine productive expansion. Informalization and disguised underemployment can temporarily inflate labor statistics even as real economic resilience deteriorates underneath.

Real conditions would surface in the fullness of time.

IIIE. Capital Consumption Disguised as Growth

This distinction matters enormously.

As Carl Menger emphasized, sustainable growth requires deepening productive structures and genuine capital accumulation. Stagflationary systems, however, often experience the opposite: capital consumption disguised as growth.

Resources increasingly migrate toward politically protected sectors, short-duration consumption, survival activities, financial speculation, and state-dependent flows rather than productivity-enhancing investment and entrepreneurial expansion.

Under such conditions, the increasingly liquidity-dependent headline GDP may continue expanding for a time even as the productive foundations underneath steadily weaken. Rather than merely coinciding with it, unprecedented liquidity conditions have actively contributed to the substantial withering reflected in GDP. (Figure 3, lowest graph)

IV. The April 7.2% CPI Shock and the Risk of a GDP Downgrade Avalanche

The April 2026 CPI shock may ultimately prove to be a turning point.

Markets initially interpreted the 7.2% print primarily through the inflation channel. But the more consequential risk may emerge through its second-order effects on growth, confidence, and financial stability.

Higher inflation compresses real household consumption (demand destruction).

It pressures business margins.
It weakens discretionary spending.
It raises political pressure for further intervention.
It erodes savings and encourages shorter-term consumption preferences as households prioritize present spending over future purchasing power.
At the same time, inflation volatility increasingly incentivizes speculative positioning over productive investment.
Entrepreneurs also become more likely to circumvent administrative controls through quality deterioration (skimpflation), quantity reduction (shrinkflation), hidden charges, informal pricing mechanisms, or off-balance-sheet adjustments—classic distortions associated with intervention-heavy inflationary environments.

Most importantly, inflation tightens real financial conditions even if nominal policy settings remain formally accommodative. The recent BSP rate hike—or even proposed off-cycle tightening measures—could further reinforce this pressure by increasing borrowing costs into an already weakening growth environment.

This distinction matters.

Liquidity conditions may appear supportive on the surface, but inflation itself functions as a hidden tightening mechanism by eroding real incomes, weakening credit quality, compressing real cash flows, and increasing uncertainty across the productive economy.

Over time, these pressures also tend to translate into rising non-performing loans, gradually impairing bank liquidity conditions while potentially creating broader solvency and capital-quality concerns if economic deterioration persists.

The result is a rising probability that Q2 growth deteriorates further.

If Q2 materially weakens following the already soft 2.8% Q1 print, consensus forecasts above 4% for full-year 2026 may face an avalanche of downward revisions.

V. Why Forecast Downgrades Matter

This matters not only economically, but psychologically.

Growth downgrades affect:

credit sentiment,
capital flows,
business investment,
peso stability,
and sovereign financing expectations.

Emerging-market slowdowns become especially dangerous once narrative confidence begins to fracture.

As Carmen Reinhart and Kenneth Rogoff repeatedly documented, highly indebted emerging economies often appear stable until confidence shifts abruptly, triggering sudden reversals in financing conditions and capital flows.

This dynamic closely parallels the “sudden stop” framework developed by Guillermo Calvo, where external financing conditions can deteriorate abruptly once investor confidence weakens amid rising macroeconomic fragility.

The danger is that these transitions are rarely linear.

Confidence can remain superficially stable for extended periods despite weakening fundamentals—until deteriorating growth, rising inflation, widening fiscal imbalances, and external vulnerability suddenly reinforce one another in a self-feeding repricing cycle.

The Philippines increasingly exhibits several of these conditions simultaneously.

VI. Labor, Debt, GIR, and the Return of Financial Stress Signals

Several secondary indicators increasingly reinforce the broader stagflation thesis.

Individually, these signals may appear manageable. Collectively, however, they point toward mounting structural fragility beneath the headline macroeconomic narrative.

VIA. Labor Market Contradictions

March 2026 labor data showed a modest employment rebound despite widespread economic disruptions.

This appears increasingly inconsistent with the oil shock’s:

transport interruptions,
agricultural weakness,
tourism softness,
manufacturing stagnation,
and slowing real demand conditions.

The more plausible interpretation is not broad-based labor strength, but labor reallocation under stress.

Workers may increasingly be pushed into:

informal employment,
low-productivity service activity,
temporary or precarious work arrangements,
and survival-sector occupations.

This would help explain why headline employment statistics appear relatively resilient even as household conditions continue deteriorating underneath.

Figure 4

In reality, labor data itself continues to reflect weakening momentum through softer employment-rate/rising unemployment trends, slowing labor-force participation, and deteriorating real purchasing power amid rising prices and decelerating output—reinforcing stagflationary conditions (Figure 4, topmost diagram)

VIB. Public Debt and the Sovereign Absorption Cycle

Public debt reached another record high of Php 18.488 trillion in March. (Figure 4, middle chart)

Q1 2026’s PHP 780.3 billion increase represented the fourth-largest quarterly expansion on record, behind only the emergency borrowing surges during the pandemic crisis in Q2 2020, Q1 2021, and Q1 2022—placing renewed emphasis on the return of quasi-emergency stabilization measures. (Figure 4, lowest graph)

Even if current levels remain formally below the DBCC’s PHP 2.7 trillion 2026 projection, the directional trend matters far more than official targets.

Figure 5

Authorities attributed part of March’s debt increase to the rise in external debt obligations resulting from peso depreciation.

But the CAUSAL relationship runs in the OPPOSITE direction.

The widening (all-time high) savings-investment gap—driven in large part by persistent public spending expansion and now reinforced by oil-shock stabilization policies—has steadily increased the economy’s dependence on external financing since Q3 2021. (Figure 5, topmost pane)

This trend has unfolded alongside the persistent deterioration in the balance of payments (BOP) over the same period, suggesting that authorities increasingly bridged structural foreign-exchange shortfalls through external borrowing. (Figure 5, middle chart)

In effect, the system has gradually accumulated larger implicit dollar-short exposure, contributing to sustained peso weakness and rising external vulnerability.

In addition, debt expansion has increasingly compensated for slowing private-sector momentum while simultaneously functioning as a transmission mechanism for oil-shock stabilization policies through subsidies, fiscal transfers, administered pricing support, and broader sovereign balance-sheet absorption.

This is a classic late-cycle dynamic: the growing use of the sovereign balance sheet as a stabilizing prop for aggregate demand and headline GDP.

But such absorption does not eliminate fragility. It merely transfers and concentrates it.

As Hyman Minsky argued, prolonged stabilization efforts often generate larger instability later because the system gradually accumulates leverage, refinancing dependence, maturity mismatches, and expectations of continuous policy support.

Over time, what initially appears as stabilization increasingly transforms into the politics of path dependency.

In many ways, the Philippines increasingly appears caught in the classic Mundell-Fleming trilemma—trying to sustain growth support, exchange-rate stability, and external capital openness at the same time amid deepening structural imbalances.

VIC. GIR Deterioration and External Balance-Sheet Pressure

The BSP’s gross international reserves (GIR) declined for a second consecutive month in April to USD 104.1 billion, marking the largest two-month decline on record and the lowest level in roughly two years. (Figure 5, lowest diagram)

This deterioration has also coincided with the recent record balance-of-payments deficit, reinforcing signs of mounting external imbalance beneath the surface.

Figure 6

Importantly, recent GIR resilience has been driven more by elevated gold valuations, even after the BSP’s massive net gold sales in 2024 (which they had to publicly defend), than by strengthening organic foreign-exchange inflows or underlying external-sector improvement.

While lower gold valuations contributed to April’s decline, much of the deterioration reportedly came from reductions in foreign investment holdings and foreign-exchange reserves. (Figure 6, topmost window)

This matters because GIR deterioration simultaneously signals:

rising external financing stress,
reserve utilization,
intensifying peso-defense pressures,
and weakening sovereign balance-sheet flexibility

The trend becomes significantly more concerning when combined with:

persistent current-account deficits,
elevated fiscal imbalances,
and continued dependence on external financing inflows.

Reserve drawdowns matter less during isolated and temporary shocks.

They become far more dangerous when structural imbalances remain unresolved underneath, because external pressure can amplify rapidly once market confidence weakens.

In highly leveraged emerging-market systems, reserve deterioration often functions less as the source of instability than as the visible symptom of deeper balance-sheet stress already building beneath the surface.

VII. Yield Curves, Peso Relief Rallies, and the Illusion of Stability

Recent market movements may be creating a misleading impression of stabilization.

The peso rallied sharply alongside the broader global risk-on move following speculation surrounding possible de-escalation in Middle East energy risks and temporary dollar softness.

Local equities also participated in the relief rally.

But beneath the surface, Philippine Treasury markets told a very different story.

Rather than easing meaningfully, rates pressure rotated across the curve. Initial post-CPI stress emerged broadly—including Treasury bills—but subsequent trading increasingly concentrated on the belly and long-end of the curve, producing renewed bearish flattening dynamics. (Figure 6, middle graph)

This matters because the belly of the curve represents the intersection of inflation expectations, liquidity conditions, and policy credibility.

On May 6th, the 7-year benchmark yield briefly breached its November 2022 inflation-cycle high, touching 7.45% before retracing modestly.

Meanwhile, the 10-year benchmark continues creeping toward similar stress levels after recently reaching 7.50%, near the prior cycle peak of 7.72%. (Figure 6, lowest diagram)

If sustained, these moves would signal that markets are no longer treating inflation as a temporary oil shock disturbance. They would instead imply rising concern that the inflation cycle is becoming structurally embedded even as growth weakens.

Importantly, this repricing occurred despite:

the interim peso rebound,
improving geopolitical risk sentiment,
temporary easing in global energy fears
and financial loosening

That divergence is critical.

It suggests domestic inflation and funding pressures are increasingly overwhelming short-term external liquidity relief.

The curve itself reveals where the stress is accumulating:

the belly reflects inflation persistence and policy stress,

while the long-end increasingly reflects duration risk, fiscal concerns, and credibility pressures

A market expecting only temporary inflation volatility would typically punish the front-end while leaving longer-duration bonds relatively stable. That has not occurred here. Instead, both belly and long-duration yields have remained elevated, implying growing uncertainty over whether inflation can be contained without materially damaging growth, sovereign financing conditions, or financial stability itself.

The arithmetic behind inflation expectations also matters.

Despite the April 7.2% CPI shock, the BSP’s stated 2026 CPI target remains 6.3%. Yet the four-month CPI average so far stands near 3.9%, implying that inflation would need to average roughly 7.5% across the remaining eight months to meet the annual target path.

Markets appear increasingly aware of this tension.

Either:

inflation pressures accelerate materially,
policy credibility weakens,
or intervention intensifies further.

Meanwhile, the recent peso recovery itself may not fully reflect underlying strength. Part of the rebound likely stemmed from global risk-on positioning, temporary dollar weakness, and possibly continued BSP stabilization activity rather than a genuine improvement in domestic macro fundamentals.

Relief rallies during structurally weak conditions can themselves become destabilizing because they temporarily reopen liquidity channels, encourage renewed speculative positioning, and delay necessary adjustment.

This is essentially a variant of the moral hazard cycle: intervention suppresses visible stress today while increasing fragility tomorrow.

The banking sector may already be signaling this transition.

Historically, bearish flattening under rising inflation pressures tightens financial conditions by compressing bank margins, raising duration risk, and weakening balance-sheet tolerance for credit expansion. Banks sit directly at the transmission channel between sovereign funding stress and private-sector liquidity creation.

Figure 7

The breakdown in the PSE Financial Index may therefore be more important than the broader PSEi 30 rally itself. (Figure 7, upper chart)

While equities briefly celebrated external liquidity relief, fixed-income markets appear far less convinced.

Philippine Treasuries continue to price a regime where inflation remains structurally elevated even as real economic conditions weaken.

This is no longer merely an inflation scare.

It is increasingly the market beginning to price the financial phase of stagflation.

VIII. Energy Politics, EPIRA Blame-Shifting, and the GEA-All Suspension

The recent political narrative blaming Electric Power Industry Reform Act of 2001 (EPIRA) for the energy situation reflects another important development: the increasing politicization of electricity pricing and cost allocation.

Instead of recognizing how years of intervention, regulatory uncertainty, distorted incentives, and delayed capacity expansion contributed to current supply pressures, policymakers increasingly gravitate toward politically convenient targets.

The suspension of GEA-All is especially revealing.

As previously discussed, GEA-All effectively socialized part of the renewable transition costs across consumers through pass-through mechanisms embedded in electricity pricing, functioning in practice as a broad-based subsidy mechanism for heavily leveraged and often politically connected renewable energy developers.

It also intersects with broader corporate and policy arrangements—including large-scale energy restructuring deals such as the SMC–AEV–MER (Chromite) transaction, alongside regulatory and fiscal adjustments such as temporary relief on real property tax (RPT) burdens—occurring amid stagnating electricity-related GDP growth over the past four quarters through Q1 2026. (Figure 7, lower graph)

Its suspension suggests rising political resistance to transferring additional energy costs onto households already under inflationary pressure.

But the issue extends far beyond GEA-All itself.

The deeper contradiction is that the state increasingly attempts to simultaneously preserve:

market-based upstream pricing,
politically tolerable retail electricity costs,
inflation containment,
accelerated renewable transition targets,
and sustained politically determined private investment incentives.

For a time, these tensions were partially masked through:

subsidies,
deferred recoveries,
socialized charges,
targeted consumer discounts,
and temporary intervention in WESM pricing mechanisms.

Loose financial conditions further delayed adjustment, as credit expansion supported demand and softened the immediate impact of cost pressures.

In effect, amid current oil-shock conditions, policymakers attempted to suppress the political visibility of inflation at the consumer level while allowing upstream costs to continue adjusting through pass-through structures.

But redistributed costs are not eliminated costs.

They merely shift the burden across consumers, firms, utilities, or eventually the fiscal system itself.

The resulting backlash surrounding electricity charges, subsidies, renewable pass-throughs, and market intervention has exposed the limits of this approach.

In a political environment increasingly shaped by entitlement expectations and permanent relief mechanisms (Free lunch politics), market-based electricity pricing becomes politically combustible once stagflation begins eroding household purchasing power.

This is why the issue is larger than EPIRA alone.

The deeper problem is the growing incompatibility between politically desired outcomes and underlying economic constraints.

The state increasingly seeks:

lower electricity prices,
stable inflation,
accelerated energy transition,
and sustained private investment simultaneously.

Yet these objectives become progressively harder to reconcile under worsening stagflationary conditions.

Hence, there is rising political pressure toward greater state control or partial socialization or full nationalization of the sector.

Attempts to stabilize one dimension increasingly generate pressure elsewhere—through subsidy burdens, pricing disputes, regulatory uncertainty, investment hesitation, or renewed intervention demands.

This recursive cycle closely resembles the interventionist dynamic described in Austrian political economy: partial interventions generate secondary distortions, which then justify further intervention, producing a self-reinforcing policy loop.

Caught within this structure, the energy sector increasingly faces competing political demands that pull policy in incompatible directions, without a clear equilibrium path under current macro conditions.

IX. Conclusion: Diminishing Returns: From Stabilization to Fragility

The central issue confronting the Philippine economy is no longer simply inflation, slowing GDP growth, or the oil shock itself.

The deeper issue is that the system increasingly appears dependent on intervention, fiscal absorption, liquidity support, and political management simply to preserve the appearance of stability.

For years following the pandemic, aggressive liquidity expansion, deficit spending, administrative controls, and repeated stabilization measures helped delay the visible consequences of structural imbalances. But over time, the composition of growth steadily weakened beneath the surface.

Private investment deteriorated.
Household demand softened.
Fiscal deficits deepened.
External deficits widened.
Debt accumulation accelerated.
System leveraging intensified.

And increasingly larger portions of economic activity became dependent on state-directed support and interventionist stabilization policies.

As a result, headline aggregates may still signal expansion even as underlying productive conditions weaken.

This is why the growing divergence between official statistics and lived economic reality matters.

Once intervention begins distorting price formation and suppressing market-clearing signals, economic statistics themselves gradually lose informational quality. Inflation pressures, financial strain, and external vulnerabilities do not disappear. They migrate elsewhere:

into weaker balance sheets,
rising sovereign dependence,
fragile credit conditions,
and deteriorating policy efficacy and credibility.

And that may ultimately define this cycle: not merely stagflation itself, but the transition toward an economy where intervention increasingly becomes the primary mechanism holding the system together—a dynamic that inevitably collides with the limits of sustainability.

As Ben Stein observed, “If something cannot go on forever, it will stop.”

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

noreply@blogger.com (Unknown) — Sun, 03 May 2026 04:14:00 +0000

The reason that interventionism does not work is that it misallocates more resources in the economy. More importantly, it disturbs, distorts, and destroys the corrective process whereby entrepreneurs, the price system, and the bankruptcy and foreclosure procedures do their jobs in reallocating resources and prices back into a sustainable framework—Mark Thornton

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

I. Prelude: Stagflation: From Distortion to Repricing

II. The 1970s Stagflation: Adjustment Deferred, Not Avoided

III. Why It “Worked”: Structure and Illusion

IV. The Structural Break: From Production to Balance Sheets

V. The Misdiagnosis: Policy as Cause vs Policy as Reaction

VI. PSE: “Cheap” Is Not Value—It’s a Signal

VII. The Real Parallel: Mispricing Before the Break

VIII. Financial Markets: When the Adjustment Starts Showing

IX. From FX to Interest Rates: The Repricing Chain

X. The Policy Trap: Tighten Into Weakness

XI. Conclusion: The Illusion Is Ending

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

Why today’s Philippine crisis is less about shocks—and more about structure

I. Prelude: Stagflation: From Distortion to Repricing

This piece builds on a series of reports examining how policy interventions have reshaped the transmission of inflation and risk in the Philippine economy.

Earlier work showed that measures such as price controls, subsidies, and liquidity support did not eliminate underlying pressures. They delayed and redistributed them—shifting inflation across sectors, compressing real incomes, and allowing imbalances in the currency, credit system, and fiscal position to accumulate beneath the surface.

This follows earlier reports, including:

Across these, the pattern has been consistent: stability was not the resolution of imbalances—but their deferral.

This installment extends that framework by placing current market behavior—particularly in foreign exchange, equities and fixed income—within a historical context.

The objective is not to argue that history repeats.

It is to show that while the structure has changed, the mechanism has not.

Markets reprice when constraints begin to bind.

And increasingly, that repricing is no longer isolated.

It is systemic.

A note on context: the parallels to the 1970s should not be read as a direct comparison of regimes. The policy structure, institutional constraints, and transmission channels today differ significantly from the Marcos Sr. period. What persists is not the form—but the mechanism of deferring adjustment. (See linked note.)

II. The 1970s Stagflation: Adjustment Deferred, Not Avoided

The Philippines is not new to stagflation.

The oil shocks of 1973 and 1979 triggered inflation surges, currency pressure, and eventually a full-blown financial crisis in 1983.

But what made the 1970s episode instructive is not the shocks themselves—it is how the system absorbed and deferred them.

Figure 1

Following the 1969 balance of payments (BoP) crisis, the peso was sharply devalued, moving from roughly 3.9 to near 6 per dollar, before continuing a managed depreciation into the 7–8 range by the early 1980s. (Figure 1, topmost pane)

The adjustment was immediate—but the consequences were not.

Growth held. Real GDP expanded strongly in 1973 and again in 1976—until the early 1980s (Figure 1, middle image)

Inflation surged during the oil shocks, with 1973 posting a sharper initial spike (~35% peak) than 1979 (~22%). Yet the true inflation (~63%) blowout did not occur during the shocks themselves—it came later, during the 1983 debt crisis. (Figure 1, lowest visual)

This is the first principle:

Inflation peaks at the point of financial rupture—not at the initial disturbance.

Figure 2

Equities confirm the same pattern. The Philippine stock index, the Phisix, reached an all-time high in January 1979—in the middle of stagflation. The collapse only followed when the system’s accumulated imbalances finally surfaced. (Figure 2, upper window)

What appeared as resilience was, in reality, deferred adjustment.

III. Why It “Worked”: Structure and Illusion

The 1970s economy was industry-led, and the market reflected it. (Figure 2, lower graph)

Mining, commodities, banks, and industrial conglomerates dominated the headline index—the Phisix, presently the PSEi 30.

Figure 3

Mining firms like Atlas, Benguet, Philex, and Marinduque were not peripheral—they were central. Mining alone likely accounted for roughly a quarter to a third of market weight at points in the decade. (Figure 3, upper table)

This mattered.

Commodity inflation translated directly into nominal earnings growth. The stock market rose not despite stagflation—but partially because of its structure within it.

But this alignment masked fragility.

External borrowing recycled global liquidity
Policy smoothing suppressed volatility
Currency management slowed visible adjustment

This is straight out of Hyman Minsky financial instability hypothesis:

Stability is not the absence of risk—it is the accumulation of it under suppressed volatility.

By the early 1980s, the system had transitioned from hedge finance → speculative → Ponzi-like dependence on refinancing.

When confidence broke in 1983, the adjustment was nonlinear and disorderly:

Peso collapse
Inflation spike
GDP contraction
Equity drawdown exceeding 80%

The 1970s didn’t avoid crisis.

They financed its delay.

IV. The Structural Break: From Production to Balance Sheets

The biggest mistake today is treating stagflation as if it still transmits through the same channels.

It doesn’t.

The Philippine economy is now services-led. The equity market is concentrated in:

Financials
Services
Utilities
Conglomerates

This is no longer a production-driven system—it is a balance-sheet-driven system.

Which means stagflation now transmits through:

Leverage (public and private) [domestic claims-to-GDP reached all-time highs in Q4 2025, coinciding with a reacceleration in M2 and M3/GDP] [Figure 3, lower graph]
External funding dependence
Liquidity conditions
Credit creation and rollover risk

This dynamic is closer to a balance-sheet-driven transmission mechanism—more in line with Richard Koo’s framework—than classical supply-shock stagflation.

Growth doesn’t collapse immediately.

It gets financially constrained first.

V. The Misdiagnosis: Policy as Cause vs Policy as Reaction

The mainstream framing—that BSP tightening is "hurting growth and markets"—gets the sequence wrong.

Tightening is not an exogenous shock.

It is a lagged reaction to prior distortions (e.g. savings-investment gap), which are being reinforced by current emergency policies, including:

Price suppression (energy, transport)
Subsidy transfers
Fiscal expansion
Liquidity injections

This is where Friedrich Hayek’s theory of malinvestment becomes critical:

Artificially suppressed price signals do not eliminate inflation—they misallocate capital, embedding inefficiencies that eventually require a more painful correction.

When tightening finally arrives, it does not “cause” fragility.

It reveals it.

VI. PSE: “Cheap” Is Not Value—It’s a Signal

The persistent discount of Philippine equities is often framed as ‘opportunity.’

That interpretation is increasingly untenable.

The discount reflects:

Figure 4

Narrow market breadth
Index concentration risk, including free-float-driven weight concentration in a small number of large-cap names (e.g., International Container Terminal Services Inc. and Manila Electric Company), with combined index influence at unprecedented levels [Figure 4, topmost image]
Weak transmission from growth to earnings
Broadening dependence on leverage rather than productivity
Deepening price distortions that transmit into real-economy misallocation

This is consistent with Public Choice Theory dynamics:

Policy frameworks optimize for political constraints rather than economic efficiency, producing structural drag that markets eventually price.

“Cheapness” here is not cyclical.

It is structural risk pricing.

VII. The Real Parallel: Mispricing Before the Break

The deeper parallel between the 1970s and today is not oil.

It is this:

Stagflation distorts asset prices before it destroys them.

The break occurs when financing conditions can no longer sustain the distortion.

In the 1970s → external debt crisis
Today → balance sheet compression + liquidity stress → ???

The danger may not be immediate collapse.

It is prolonged mispricing.

VIII. Financial Markets: When the Adjustment Starts Showing

Recent market behavior suggests the adjustment is no longer latent.

From the outbreak of the February 28, 2026 Iran war to May 1, Philippine equities have materially underperformed regional peers—the second worst performer after Indonesia, while the peso has simultaneously weakened to record levels. [Figure 4, middle diagram]

But the sequencing matters more than the outcome:

Government securities outflows began in Q4 2025 and worsened in Q1 2026, dragging overall foreign portfolio flows to their deepest quarterly outflows since at least 2020 [Figure 4, lowest chart]
PSE outflows persisted throughout 2025
Currency weakness accelerated into 2026
External shocks have accelerated volatility.

They did not initiate it.

This aligns with Dornbusch Overshooting Model dynamics:

Exchange rates adjust rapidly—not because shocks are new, but because imbalances were already embedded.

What we are seeing is not reaction.

It is exposure.

Attributing the move to a “strong dollar” or external shocks is not analysis—it is attribution bias dressed up as explanation, deflecting from domestic policy choices that built the conditions for this adjustment.

Global factors may set the trigger.

Domestic imbalances determine the magnitude.

IX. From FX to Interest Rates: The Repricing Chain

The move past 61 in USDPHP is not a currency story.

It is the first visible break in a multi-layer repricing cycle.

The sequence is now clear:

Figure 5

1. FX moves first

Driven by external deficits, energy imports, depletion of buffer and capital outflows.

2. The belly reprices (3–7Y)

Reflecting expectations of forced policy tightening (Figure 5, topmost pane]

3. Term premiums widen (10Y and beyond)

Consistent with duration risk being repriced beyond near-term policy expectations [Figure 5, middle image]

This progression is not occurring in isolation.

The widening spread between Philippine 10-year yields (BVAL) and U.S. Treasuries (TNX) has tracked the move in USDPHP, reinforcing the pattern: currency stress is being matched by higher required returns on local duration. [Figure 5, lowest chart]

This is not simply global rates pulling yields higher.

It is domestic risk being repriced across FX and bonds simultaneously.

X. The Policy Trap: Tighten Into Weakness

Unlike 2021–2022, the system now faces:

Weaker growth
Higher fiscal dependence
More fragile balance sheets

Which creates a constraint:

Policy cannot ease without worsening inflation and FX pressure.
Policy cannot tighten without compressing growth and liquidity.

This is a classic stagflationary policy trap.

And it reinforces our core thesis:

The peso is not the cause.

It is the pressure valve.

These distortions are not abstract. Recent interventions—from the suspension and subsequent restoration of the Wholesale Electricity Spot Market (WESM)—effectively redistributing costs rather than removing them (which affirms our recent call), to staggered power rate adjustments and subsidy layering, to DOLE looking at a Php 600 minimum wage hike in NCR, to the CHED declaring no tuition increases to the BSP’s April CPI projection heating up 5.6% to 6.4% —illustrate the same pattern: prices are suppressed, pressures accumulate upstream, and are later released into the system with greater force.

Figure 6

This distortion is already visible at the firm level. Manila Electric Company [PSE:MER] belatedly release 2025 Annual Report shows (pre-war, pre-oil shock) revenues rising sharply—driven not by demand, but by pass-through charges, regulatory recoveries, and expanding generation-side income—even as electricity consumption contracts. [Figure 6]

The divergence is structural: nominal revenues are being supported by fuel costs, grid charges, currency effects, and reserve market dynamics, while underlying usage weakens.

This is the money illusion in practice—where rising prices and cost recovery sustain top-line growth, masking real demand erosion.

It also reveals how regulatory and policy frameworks redistribute cost pressures—disproportionately benefiting incumbents and entities positioned within the regulatory structure—rather than absorb them. Within a pass-through pricing system, higher fuel, currency, and grid costs are transferred directly to consumers, sustaining revenues while weakening purchasing power.

Over time, this produces structurally higher and less competitive energy costs—eroding real incomes and compressing savings.

In a consumption-driven economy, that is not resilience.

It is price-induced demand compression/demand destruction.

It also shows that downstream utilities are not insulated from stagflation—they internalize it through pricing while externalizing its costs to consumers.

XI. Conclusion: The Illusion Is Ending

The lesson of the 1970s is not that stagflation causes immediate collapse.

It is that systems can appear stable while imbalances accumulate beneath the surface.

That dynamic has not changed.

What has changed is structure.

Then, distortions were anchored in production and commodities—where rising prices could partially offset inflation’s drag.

Today, fragility sits in balance sheets, within a consumption-driven economy increasingly dependent on credit.

This distinction matters.

Consumption financed by leverage is inherently unstable. It holds—until financing conditions tighten.

Which means the adjustment is not guaranteed to be gradual.

It can appear contained—until constraints bind.

External shocks—whether from energy, currency, or global liquidity—do not create the crisis.

They expose imbalances already embedded in the system.

When that happens, the transition is no longer linear.

It becomes a sudden repricing of demand, liquidity, and risk.

Deferred adjustment does not eliminate crisis.

It compounds and compresses it.

The market is not misreading noise.

It is beginning to price a system where stability depends on conditions that may no longer hold.

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

noreply@blogger.com (Unknown) — Sun, 26 Apr 2026 04:18:00 +0000

What we have here is the Keynesian error that inflation cannot emerge while widespread excess capacity exists. Underpinning this error are two dangerous fallacies: The first error treats inflation as a case of rising prices. In fact, rising prices are a symptom of inflation and one that is not always present if we think of prices in absolute terms. The second error treats capital as homogeneous. What this means is that Treasury and Reserve officials are arguing that stagflation is impossible. Mainstream economists have never grasped the fact that it is the heterogeneous nature of capital that makes stagflation possible—Gerard Jackson

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

In this issue

I. The Stagflation Trap Tightens

II. The BSP’s Rate Hike and the Return of Monetary Tightening

III. The Record Balance-of-Payments Deficit

IV. The Yield Curve’s Warning Signal

V. Liquidity Is Not Confidence

VI. Fiscal Expansion and the Demand Leak

VII. Inflation Is Being Politically Managed

VIII. Mounting Social Stress Signals

IX. The Emerging Policy Trap

X. Conclusion: Stagflation 3.0: Cure is Worse than the Disease

The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

Rate hikes, fiscal expansion, and politically managed inflation are pushing the Philippine economy deeper into a stagflationary policy trap.

I. The Stagflation Trap Tightens

In two earlier essays—“Stagflation Is Already Here—Emergency Policies Are Now Entrenching It” and “Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook”—we argued that the Philippines was drifting toward policy configurations that increasingly reinforces the feedback loop between inflation and weakening growth.

The Bangko Sentral ng Pilipinas’s (BSP) rate hike, the country’s record first-quarter balance-of-payments deficit, and widening fiscal pressures all point to the same underlying tension: policymakers are attempting to stabilize inflation, manage external vulnerabilities, sustain growth, and preserve financial stability in the banking and credit system simultaneously.

This last constraint is often understated but central.

Monetary policy in practice does not operate in a binary space between inflation and growth.

It also operates through the credit channel: low interest rates support liquidity, asset valuations, and leveraged expansion, while higher rates trigger repricing of risk, debt service stress, and potential balance sheet compression.

In this sense, policy is not only balancing macroeconomic objectives—it is also managing the fragility created by prolonged credit expansion—now worsened by supply dislocation.

This is why tightening cycles are rarely clean.

Higher rates are used to defend the currency and anchor inflation expectations, but they also risk exposing leverage accumulated during extended periods of low rates and accommodative liquidity conditions.

Conversely, prolonged easing supports growth and asset markets but increases internal and external vulnerability through accumulated malinvestments and artificial inflation inertia.

The result is not a simple trade-off between inflation and growth, but a multi-layered constraint between:

price stability
external balance
growth momentum
financial system stability

Instead of resolving these tensions, policy actions across fiscal, monetary, and regulatory fronts are increasingly interacting in ways that amplify them.

This article—the third installment in the stagflation series—examines how those pressures are now converging across three fronts:

monetary tightening
external financing stress
administrative management of inflation

Together, they reveal an economy gradually slipping into a policy trap.

II. The BSP’s Rate Hike and the Return of Monetary Tightening

The BSP’s decision to raise policy rates marks a significant pivot after nearly two years of easing and liquidity support.

While the move is formally framed as an inflation response, its immediate macro function is increasingly linked to exchange rate stabilization under external pressure.

This distinction matters.

Figure 1

Inflation pressures had already been building before the Iran war’s oil shock—adding a new external impulse. (Figure 1, upper window)

After the record 60.748 closing at the end of March, the USDPHP reached an intraday all-time high of 60.8, then closed at 60.7 per dollar last April 24—the second highest, possibly due to BSP interventions.

All this shows that at this threshold, the policy constraint is no longer just price stability. It becomes external financing stability.

A weakening peso increases the domestic cost of:

imported fuel
food inputs
industrial commodities

But more importantly, it raises the cost of servicing external obligations and financing import dependence, particularly in energy.

This puts the central bank in a constrained position.

Higher interest rates are used to:

defend the currency by narrowing interest differentials
reduce capital outflow pressure
stabilize expectations in FX markets

But these same rate increases risk tightening domestic credit conditions in an economy already facing weak external demand and rising import costs.

The BSP therefore faces a dual transmission problem:

defend the peso to contain imported inflation
avoid over-tightening that weakens domestic growth and financial stability

The fact that the BSP is tightening policy while imposing regulatory relief for banks reflects this intensifying tension between external stabilization and internal fragility management.

And it is not only the central bank responding to these pressures.

Citing risks related to the Middle East conflict and global energy uncertainty, a major domestic bank—Bank of the Philippine Islands—recently indicated that it has begun tightening consumer credit standards.

While framed as a precaution against external shocks, the move may also reflect mounting stress within household balance sheets, particularly after credit-card non-performing loans reached record highs as of December 2025— reinforcing what we describe as the Wile E. Coyote “denominator effect” dynamic. (Figure 1, lower image)

This is no longer a pure inflation cycle. It is increasingly a balance-of-payments-sensitive monetary tightening regime.

III. The Record Balance-of-Payments Deficit

The external sector is now the primary amplifier of domestic macro stress.

Figure 2

The Philippines recorded a record first-quarter balance-of-payments (BoP) deficit, reflecting sustained net dollar outflows. (Figure 2, topmost pane)

At its core, the balance of payments measures whether the country is accumulating or depleting foreign currency buffers. A deficit signals persistent dollar leakage.

The immediate drivers are familiar:

rising energy import costs and persistent trade deficits
weaker portfolio inflows amid higher global interest rates
capital outflows and elevated external debt repayments

But the more important mechanism is how the system actually finances external shocks.

Energy and oil price spikes do not simply show up as higher import bills. They are absorbed through a layered financing structure: external borrowing, portfolio inflows into government securities, and—crucially—drawdowns of foreign reserves.

Gross International Reserves (GIR) function as the first shock absorber, temporarily covering imbalances before adjustment shows up in the exchange rate. This buffer, however, is not neutral. The BSP reported that GIR fell by over USD 6.6 billion in March 2026 to USD 106.6 billion—the largest monthly decline since at least 2012—driven partly by valuation effects from gold prices, but also by intervention pressures and external payment financing needs. (Figure 2, middle and lowest graphs)

This is where recent bond market dynamics and index-related inflows become relevant: they operate less as signals of confidence and more as temporary financing channels for external imbalances that the reserve buffer alone cannot fully absorb.

The result is sustained pressure on the peso.

Exchange rate movements reflect underlying imbalances—particularly when dollar inflows are insufficient to cover import demand and debt-related outflows—while also serving as the primary adjustment mechanism.

That adjustment then feeds directly into domestic inflation, given the Philippines’ structural dependence on imports for:

fuel and energy inputs
food commodities
intermediate industrial goods
consumer goods

The causal chain is therefore not simply:

BoP deficit → peso depreciation → inflation

but, more comprehensively, can be framed as:

external shock (energy) → higher import bill and financing needs → increased reliance on borrowing, portfolio inflows, and reserve drawdowns → depletion of GIR buffers → widening BoP deficit → FX market pressure → peso depreciation → imported inflation → monetary tightening

At that point, monetary policy is no longer setting conditions independently. It is reacting to external financing constraints embedded in the energy import structure of the economy.

In effect, economic growth itself becomes constrained by the availability of external financing. When an economy relies heavily on imported energy and persistent trade deficits, expansion requires a steady inflow of foreign capital or reserve drawdowns to finance those gaps. Once those inflows weaken, growth becomes limited not by domestic capacity alone, but by the system’s ability to secure foreign currency.

IV. The Yield Curve’s Warning Signal

Financial markets reacted immediately to the rate hike.

Figure 3

Philippine government bond yields spiked at the belly of the curve, producing a bearish flattening.

In practical terms:

mid-term yields rose sharply, reflecting inflation risk and policy tightening expectations
long-term yields rose less, suggesting markets expect weaker growth and eventual policy easing or constraint

This pattern is not neutral.

A bearish flattening typically emerges when investors believe tightening will compress economic activity faster than it resolves inflation pressures.

But in the current context, the signal is more specific than a standard cycle interpretation.

The yield curve now reflects a system where three constraints are converging simultaneously:

monetary tightening aimed at defending inflation credibility and the currency
widening fiscal deficits increasing sovereign issuance and duration pressure
external financing stress amplifying currency risk and imported inflation

In that sense, the curve is not simply pricing slower growth.

It is pricing policy collision with structural imbalances.

When fiscal expansion, external deficits, and monetary tightening operate simultaneously, bond markets begin to shift from pricing inflation expectations to pricing sustainability constraints—particularly the ability of the system to finance itself without continuous external support.

This is the point where yield curves begin to reflect not just cyclical tightening, but the kind of debt and financing sustainability concerns highlighted in the work of Reinhart and Rogoff on emerging market stress episodes.

In this environment, the BSP’s rate hike may still anchor short-term inflation expectations, but the curve suggests markets are increasingly focused on the medium-term interaction between fiscal expansion, inflation, external vulnerability, and growth deceleration.

The message is therefore not only that tightening may slow growth.

It is that policy tightening is occurring inside a system where fiscal and external constraints are already binding.

V. Liquidity Is Not Confidence

One development that risks obscuring these structural weaknesses is the Philippines’ expected inclusion in a major emerging-market bond index administered by JPMorgan Chase.

Index inclusion is widely celebrated by authorities as a vote of investor confidence.

But the mechanics are more prosaic.

Funds that track such indices must purchase Philippine bonds once the country enters the benchmark. The resulting inflows are technical reallocations, not necessarily discretionary investment decisions based on improving fundamentals.

In other words, passive flows can create liquidity without signaling confidence.

In some cases, they can even mask underlying fragility by making it easier for governments to finance deficits.

Indeed, the Philippines’ inclusion appears to have followed a liquidity surge rather than a return surge.

Based on ADB data, secondary-market trading volume in Philippine government securities jumped more than 60% in 2025, while foreign holdings climbed to around 4.9%—roughly returning to 2019 levels. (Figure 3, middle and lowest charts)

Yet despite heavy positioning during the Treasury rally, bond investors have seen limited gains.

Liquidity arrived—but returns did not.

That distinction matters.

Markets can become liquid for many reasons—index rebalancing, regulatory shifts, or global liquidity spillovers—but sustained investor confidence usually reveals itself through returns, not merely trading volume.

Meanwhile, the macro backdrop tells a different story.

Fitch Ratings recently revised the Philippines’ sovereign outlook from stable to negative, citing the country’s exposure to energy price shocks and rising external vulnerabilities.

A negative outlook does not immediately change the country’s investment-grade rating. But it signals growing concern about medium-term macroeconomic risks.

If fiscal deficits continue widening while the balance-of-payments gap expands, the inflows triggered by index inclusion may end up financing deeper imbalances rather than resolving them.

And if stagflation pressures intensify, the same liquidity that entered mechanically could leave just as mechanically.

In that scenario, investors who mistook liquidity for confidence may discover that liquidity works both ways.

VI. Fiscal Expansion and the Demand Leak

Fiscal dynamics form the third pillar of the stagflation risk.

Government spending continues to support domestic demand, but part of that demand inevitably leaks into imports—particularly energy and capital goods.

The macro mechanism is straightforward:

Fiscal expansion boosts domestic spending.
Higher spending increases imports.
Imports widen the trade deficit.
The trade deficit worsens the balance-of-payments gap.
Currency depreciation raises inflation.

In effect, fiscal stimulus partially leaks into the external sector and returns as inflation through the exchange rate. Monetary tightening must then offset not only domestic demand pressures but also external price transmission through the peso.

Recent fiscal data confirm that this dynamic is already unfolding.

March 2026 expenditures reached Php 654.8 billion, the second-largest March spending level on record and the largest outside December, traditionally the peak disbursement month.

Figure 4

Despite a seemingly modest 5.23% year-on-year increase, the government still posted a Php 349.7 billion deficit, the third-largest monthly deficit historically and the largest outside December. (Figure 4, topmost visual)

For Q1 2026, total expenditures reached Php 1.49 trillion, up 3.2% year-on-year and the largest first-quarter spending level on record. The deficit for the quarter reached Php 355.5 billion, the second-largest first-quarter deficit historically, even though headline narratives emphasized that the deficit had “narrowed” relative to last year. (Figure 4, middle diagram)

A closer look at revenues reveals additional fragility.

Total revenues rose 9.25% in March and 13.74% in Q1, but this growth was heavily skewed toward non-tax revenues, which jumped 45.5% in March and more than doubled (149%) in Q1.

Much of this increase reflects early dividend remittances from Government-Owned and Controlled Corporations (GOCCs)—a timing maneuver rather than evidence of strengthening economic activity.

As a result, non-tax revenues accounted for roughly 14.6% of total collections, the second-highest share since 2020 when emergency pandemic measures inflated similar inflows. (Figure 4, lowest image)

Figure 5

By contrast, the core signal of economic momentum—tax revenues—showed clear weakness.

Q1 tax collections grew only 4.04% year-on-year, the slowest pace since the pandemic recovery year of 2021 and comparable to the subdued 4.21% growth recorded in 2023. (Figure 5, upper pane)

In other words, fiscal revenues are increasingly being supported by extraordinary transfers rather than organic economic expansion.

Meanwhile, spending pressures are likely to intensify.

The 2026 national budget totals Php 6.793 trillion. With Php 1.49 trillion already disbursed in Q1, roughly 22% of the annual program has been spent.

This leaves Php 5.30 trillion to be disbursed over the remaining nine months of the year—equivalent to an average of roughly Php 589 billion per month, implying materially higher spending ahead.

Several forces could accelerate that pace:

emergency energy spending amid global supply risks
catch-up infrastructure disbursements after a slow start to the year
election-cycle fiscal pressures
seven consecutive years of spending allocation exceeding enacted budgets (Figure 5, middle graph)

Debt servicing is already reflecting the cumulative impact of these dynamics.

Total debt servicing—interest and amortization combined—soared 115.6% year-on-year in Q1 to Php 737.4 billion, marking the second-largest quarterly debt service burden since 2024. (Figure 5, lowest chart)

This increase reflects the combined effects of:

higher borrowing levels
elevated global interest rates
weaker peso conditions
the compounding impact of repeated deficits

As fiscal spending accelerates through the remainder of the year, additional borrowing will likely intensify this trend.

All told, the fiscal accounts reveal a pattern consistent with stagflationary stress:

slowing tax revenue growth pointing to weaker economic momentum
rising programmed public spending, alongside emergency spending increases responding to energy shocks and slowing economic momentum
increasing debt service tightening fiscal constraints

The result is a familiar macroeconomic configuration: weakening growth alongside expanding deficits and rising public debt.

And because much of that fiscal stimulus ultimately leaks into imports, the adjustment returns through the exchange rate—feeding the very inflation pressures the central bank is now attempting to contain.

VII. Inflation Is Being Politically Managed

Perhaps the most revealing aspect of the current environment is how authorities are attempting to manage rising costs.

Instead of relying primarily on monetary policy, the government has increasingly turned to administrative interventions across sectors.

Examples include:

price caps on essential food items such as canned sardines—even as producers warn that sardine prices will soon rise
pressure on oil companies to implement fuel rollbacks
regulatory threats that the state could intervene or even take over segments of the petroleum industry for non-compliance
sustained fare suppression for domestic transport operators

Yet policy treatment is far from uniform.

Aviation regulators recently allowed airlines to raise fuel surcharges, pushing up ticket prices. Meanwhile, land transport operators remain subject to fare suppression even as fuel and operating costs climb.

The result is an asymmetric price system.

Some sectors are allowed to pass on costs. Others are forced to absorb them.

Such asymmetry reveals that inflation is increasingly being managed politically rather than economically.

Sectors with concentrated market power or stronger institutional leverage are allowed to adjust prices, while politically sensitive sectors—particularly those affecting mass consumers—are subjected to administrative controls.

The result reflects a familiar political-economy pattern: concentrated benefits and dispersed costs, a dynamic long observed in the work of economist Mancur Olson.

At the same time, price caps and administrative rollbacks distort the information function of markets. Prices cease to transmit signals about scarcity, costs, and demand conditions. Instead, they become political variables.

As Friedrich Hayek argued, when price signals are suppressed, economic coordination deteriorates.

Producers respond by cutting output, delaying investment, or reducing quantity (shrinkflation)—or quality adjustments (skimpflation) that eventually reappear as shortages or service deterioration.

Recent reports of domestic carriers cutting routes after prolonged fare suppression illustrate how supply eventually adjusts when prices cannot.

Ironically, the policy contradictions are now visible even in official inflation projections.

Figure 6

The BSP itself now expects inflation pressures to rise toward around 6.3% in 2026, despite the growing use of price caps and administrative interventions. (Figure 6, topmost image)

With inflation averaging just 2.83% in Q1, the BSP’s 6.3% inflation outlook for 2026 implies roughly 7.5% inflation over the remaining nine months of the year. For example, sardine producers have already warned about price increases despite the DTI’s implicit price cap.

In other words, the authorities appear to be tightening monetary policy while simultaneously acknowledging that inflation will remain elevated.

As a side note, an average inflation rate of around 7.5% over the remaining nine months would reinforce our earlier prognostication of a third wave in the inflation cycle. (Figure 6, middle chart)

That is to say, if inflation is expected to rise even under expanding price controls, the implication is difficult to ignore: the controls are not suppressing inflation—they are merely redistributing it across sectors and over time.

What disappears from official price indices today often reappears tomorrow in the form of higher subsidies or balance sheet transfers, deteriorating service quality, or supply shortages.

Inflation, in this sense, is not being eliminated. It is being reallocated.

Blunt truth: Price controls inevitably fail.

VIII. Mounting Social Stress Signals

The macroeconomic pressures described above are no longer confined to fiscal accounts, bond markets, or exchange rates.

They are increasingly visible at the household or even at the grassroots levels.

A recent SWS survey on perceived quality of life suggests a spike in the share of Filipinos reporting worsening financial conditions, potentially reflecting the cumulative impact of rising living costs, stagnant real incomes, eroding savings and weakening economic momentum. This trend has been gradually rising since 2018. (Figure 6, lowest image)

At the same time, localized crises are multiplying.

Within a span of roughly two weeks, three separate state-of-calamity declarations were issued: first in Cagayan de Oro, then in the City of Baguio, and most recently the Cagayan Valley region. Officials attribute these emergencies to a mix of drought conditions, energy costs, and disruptions to local livelihoods.

But the clustering of such declarations raises a broader macroeconomic question.

Natural shocks occur regularly in the Philippines. What appears to be changing is the economy’s ability to absorb them.

When food prices surge, fuel costs rise, or weather shocks disrupt production, the system increasingly responds with emergency fiscal transfers, price interventions, and regulatory measures. Each episode becomes another localized crisis requiring state intervention.

This deepening reliance on interventions suggests that the country’s economic shock absorbers—household savings, business buffers, and fiscal space—are eroding.

In a healthy expansion, localized shocks remain contained. In a fragile macro environment, they propagate outward.

Seen in this context, the recent wave of calamity declarations may be less a series of isolated events than symptoms of a broader stagflationary environment: rising costs colliding with weakening growth.

If that trajectory continues, the risk is not only persistent inflation but also a gradual drift toward recessionary conditions, where policy interventions attempt to cushion economic stress but worsen underlying imbalances.

IX. The Emerging Policy Trap

Overall, the week’s developments reveal a difficult macroeconomic configuration.

The Philippines is confronting simultaneous and deepening pressures from three fronts:

inflation driven by energy costs and currency depreciation
fiscal deficits sustaining domestic demand
external imbalances weakening the peso

These forces are not independent. They interact in ways that constrain policy choices and reflect a self-reinforcing macroeconomic feedback loop.

Large fiscal deficits sustain spending and credit expansion, but they also widen the country’s savings-investment gap. That gap must be financed through external borrowing and capital inflows. When those inflows weaken—as reflected in the record balance-of-payments deficit—pressure shifts directly onto the currency.

Peso depreciation then feeds back into the domestic economy through imported inflation, particularly in energy and food.

At that point, policymakers face increasingly uncomfortable and complex trade-offs with intertemporal and unintended consequences.

Higher interest rates may provisionally stabilize the currency but risk slowing already fragile growth.
Fiscal support may momentarily sustain activity but widens external imbalances and inflation pressures.
Administrative price controls may temporarily suppress headline inflation but distort supply and investment decisions.

Each intervention therefore displaces stress elsewhere in the system—often with unintended consequences.

What emerges is not a single policy mistake but a policy trap—a configuration where the available tools begin to undermine one another.

Economist Hyman Minsky observed that prolonged periods of credit-supported stability often evolve into fragile financial structures. When shocks arrive, policymakers attempt to stabilize the system through further intervention, but each intervention can deepen the underlying imbalance.

The result is a system that becomes increasingly dependent on policy management even as the effectiveness of those policies declines—effectively the law of diminishing returns at work.

X. Conclusion: Stagflation 3.0: Cure is Worse than the Disease

While earlier inflation episodes in the Philippines were largely associated with supply disruptions, concealed beneath the headlines were the fiscal, credit, and liquidity effects reinforcing them.

Yet the current environment appears structurally different.

The pressures now emerging reflect deeper forces:

persistent and deepening fiscal deficits
chronic external imbalances
currency weakness feeding imported inflation
populist policy interventions increasingly shaping price signals across sectors

These dynamics are precisely what this Stagflation 3.0 series seeks to examine.

Although we have long discussed the historical rhyme of Philippine CPI cycles, the term here does not describe a chronological phase of inflation. Rather, it refers to a series of analyses examining how current policy responses—fiscal expansion, administrative controls, and reactive monetary tightening—interact with structural imbalances in the Philippine economy.

Viewed through this lens, the emerging risk is not simply higher inflation or slower growth. It is the interaction of both—stagflation.

Rising costs erode household purchasing power, leading to demand destruction.
Slowing growth weakens investment and employment.

Policy responses attempt to cushion these pressures but simultaneously constrain the policy space available to address them.

In such an environment, macroeconomic management gradually shifts from preventing imbalances to managing their consequences—worsening socio-economic maladjustments.

The cure becomes worse than the disease.

And that dynamic may ultimately define the conditions this series describes as Stagflation 3.0.

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

noreply@blogger.com (Unknown) — Sun, 19 Apr 2026 03:24:00 +0000

It used to be that recessions were accompanied by falling prices. Because of this few people realised that though prices in general fell consumer prices rose relative to producer prices. In other words, capital goods suffered the greatest price declines. Now that central banks inflate to prevent price declines we can find ourselves in a situation where consumer prices are rising faster than producer prices even as a large pool of unemployed emerges. This is stagflation—Gerard Jackson

In this issue:

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

I. Colliding Policies in an Emerging Stagflation Environment

II. The Triangle of Intervention

III. The Return of War-Time Economics

IV. Energy Bailouts and Socialized Losses

V. BSP’s Hawkish Rhetoric, Shadow Monetary Easing

VI. Ratchet Effect: The Pandemic Rescue Framework That Never Ended

VII. Oil Shock Meets Banking System Stress Beneath the Surface

VIII. External Risks: Oil and the Strait of Hormuz

IX. A System Moving Toward Structural Stagflation

X. Conclusion: The Institutionalization of Crisis Policy

Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook

How fiscal dependence on inflation, regulatory interventions, and shadow monetary easing are locking the Philippine economy into a structural stagflation regime.

I. Colliding Policies in an Emerging Stagflation Environment

Recent policy developments across the Philippine economy reveal a system increasingly defined by conflicting interventions.

Authorities have attempted to cushion consumers from rising costs by suspending excise taxes on Liquefied Petroleum Gas (LPG) and Kerosene, while refusing similar relief for gasoline and diesel. The explanation offered by policymakers was not economic but fiscal: the government argued that suspending excise taxes on gasoline and diesel would result in roughly Php 43 billion in lost revenue, compared with about Php 4.1 billion for LPG and kerosene.

This framing reveals the real constraint—fiscal dependence on inflation-driven tax revenues.

At the same time, authorities are pushing in the opposite direction elsewhere in the economy.

The National Food Authority has raised rice buying prices in an attempt to support farmers, while wage pressures are intensifying following minimum wage hikes in Central Luzon and renewed calls for increases in Baguio City.

Authorities are also expanding a new round of credit and income support programs across multiple sectors of the economy. Emergency loan facilities have been announced for micro, small, and medium enterprises (MSMEs), while the Department of Agriculture has introduced loan moratoriums for farmers and fisherfolk facing rising production costs.

The Social Security System has also proposed allocating roughly Php 60 billion for expanded lending programs while accelerating pension increases, alongside discussions of targeted cash assistance for middle-income households and minimum-wage earners.

These measures inject liquidity and sustain household demand while simultaneously raising production costs upstream. The result is a dual pressure dynamic: stronger consumption collides with weakened supply conditions, compressing producer margins, discouraging output, and increasing reliance on imports.

Margin compression weakens domestic supply responses, forcing greater reliance on imports. For a country already structurally dependent on imported food, fuel, and intermediate goods, this dynamic worsens trade deficits and exposes the economy further to external shocks.

Such policy contradictions lie at the core of what economists describe as stagflationary dynamics—a situation where policies designed to alleviate inflation instead weaken production and reinforce price pressures elsewhere.

II. The Triangle of Intervention

Many of the policies now unfolding can be understood through the concept of triangular intervention—a term used by Austrian economist Murray Rothbard to describe government actions that compel or prohibit exchanges between two private parties.

Unlike taxation or subsidies, which transfer resources directly between the state and citizens, triangular interventions reshape the conditions under which individuals and firms are allowed to transact. Price controls, regulatory mandates, credit allocation programs, and production quotas are classic examples because they force market participants to exchange under state-imposed terms—or prevent them from exchanging altogether.

Once such interventions are introduced, additional policies often follow in order to manage the distortions they create.

In practice, the Philippine policy response increasingly resembles a triangular structure of intervention linking fiscal transfers, monetary accommodation, and regulatory relief.

These policy actions are not isolated. They form a self-reinforcing intervention triangle.

Price relief measures reduce immediate political pressure from rising costs.
Subsidies and fiscal transfers sustain demand and prevent short-term economic adjustment.
Inflation-driven tax revenues, particularly through value-added taxes and excise collections, provide the fiscal space to finance those subsidies.

Each corner of the triangle reinforces the others.

A. Price relief

→ reduces political pressure

→ allows inflation to persist elsewhere

B. Subsidies

→ sustain demand

→ delay supply adjustment

C. VAT windfalls

→ finance interventions

→ encourage further policy expansion.

Because value-added taxes are collected as a percentage of nominal prices, inflation automatically boosts government revenue even without legislative tax increases. This dynamic effectively transforms inflation into an implicit tax mechanism that helps finance fiscal deficits

The result is a system characterized by persistent inflation, expanding fiscal intervention, and weakening supply responses—a structure that gradually locks the economy into a stagflationary trajectory.

This dynamic also reflects a broader pattern identified by several strands of economic theory.

Murray Rothbard described how successive government interventions often generate distortions that then justify further intervention in a cumulative process.

János Kornai later characterized similar systems as operating under “soft budget constraints,” where firms and institutions come to expect rescue when financial pressures emerge.

In financial markets, Hyman Minsky observed that prolonged stabilization policies can encourage rising leverage and risk-taking, gradually transforming stability itself into a source of fragility.

The Philippine policy mix increasingly exhibits elements of all three dynamics simultaneously.

III. The Return of War-Time Economics

Many of these policies also resemble the economic management frameworks historically used during wartime mobilization or the "war economy."

Price controls, directed credit programs, industrial coordination, and regulatory mandates were originally designed to manage supply shortages and stabilize critical sectors during periods of national emergency.

In the Philippine case, however, similar instruments are now being deployed outside wartime conditions—reflecting an economy increasingly governed through administrative intervention rather than decentralized market coordination.

IV. Energy Bailouts and Socialized Losses

Recent developments in the power sector illustrate how these dynamics operate in practice.

Regulators recently approved a mechanism allowing Meralco to recover more than Php 4 billion from consumers through tariff adjustments tied to disruptions in gas supply from an affiliate-linked generation facility, effective September.

This episode demonstrates how upstream contractual disruptions are transformed into regulated cost pass-throughs, effectively socializing losses across captive electricity consumers.

Such arrangements stabilize corporate balance sheets while transferring the burden of adjustment to households and businesses.

Additionally, this confirms our November 2025 analysis of the SMC–MER–AEV deal—an implicit bailout that magnifies the fragility loop.

V. BSP’s Hawkish Rhetoric, Shadow Monetary Easing

Against this backdrop, the Bangko Sentral ng Pilipinas (BSP) has sought to maintain a public posture of policy discipline, signaling that it has room to raise interest rates.

However, the measures being deployed tell a different story.

Recent announcements include:

loan grace periods for affected borrowers
discretion for banks in restructuring distressed loans
regulatory relief affecting nonperforming loan classification.

While presented as targeted assistance, these policies function as shadow monetary easing. They support bank balance sheets and credit expansion while allowing the central bank to maintain the appearance of a cautious monetary stance.

Crucially, these actions coincide with successive interest rate cuts, aggressive reductions in reserve requirement ratios and the doubling of deposit insurance coverage, both of which expand liquidity within the financial system.

Persistent liquidity expansion also increases pressure on the exchange rate, forcing the central bank to balance domestic financial stabilization against currency defense.

The BSP’s demonstrated preference—judging by its policy actions—points clearly to an easing bias.

Yet, not all bank rescues appear directly in fiscal budgets.

During the 2023 United States banking crisis, for instance, large-scale stabilization measures were implemented primarily through central bank liquidity facilities rather than explicit fiscal bailouts.

The Philippine approach appears to be moving along a similar path.

VI. Ratchet Effect: The Pandemic Rescue Framework That Never Ended

Authorities deployed this stabilization framework during the pandemic recession as an emergency response.

More than five years later, however, that emergency architecture has not been unwound. Instead of normalization, deficit spending has become structurally embedded in the system.

Figure 1

Public debt continues to reach new highs. Universal and commercial bank lending relative to GDP is at record levels, while public debt-to-GDP has climbed back to levels last seen in 2005. (Figure 1, upper and lower graphs)

Figure 2

At the same time, both banking system net claims on the national/central government (NCoCG) and central bank exposures have expanded significantly, drifting near or exceeding historical peaks. (Figure 2, upper window)

Fiscal outcomes reinforce this pattern. The 2025 deficit ranks among the largest in the country’s history, while combined public and formal financial sector leverage has risen to approximately 113 percent of GDP.

Liquidity conditions tell the same story. Although M2 broad money has declined from its pandemic peak of roughly 76 percent of GDP in 2021, it remained near 70 percent in 2025—well above historical norms. (Figure 2, lower diagram)

All told, these trends suggest that pandemic-era interventions did not merely stabilize the economy temporarily; they fundamentally reshaped its structure.

The system now operates with a deepening reliance on elevated leverage, abundant liquidity, and recurring policy support.

This dynamic closely reflects the Robert Higgs concept of the "ratchet effect," where government expansion during crises is rarely reversed. Instead, emergency measures leave behind institutional and political legacies that permanently raise the baseline of state intervention, making each subsequent intervention easier to justify and more difficult to unwind.

VII. Oil Shock Meets Banking System Stress Beneath the Surface

Pre-Iran war banking data indicates that pressures may already be building beneath the surface.

Figure 3

The ratio of cash to deposits fell in February 2026 to its lowest level in at least a decade. (Figure 3, upper pane)

Meanwhile, liquid assets relative to deposits, although rebounding slightly in February, remain near levels last seen during the early months of the pandemic in 2020.

At the same time, banks have been rapidly increasing their holdings of available-for-sale (AFS) securities, which surged over the past three months to one of the highest nominal levels on record. This expansion may be temporarily boosting reported liquidity metrics. (Figure 3, lower image)

Credit quality indicators show similar dynamics.

Figure 4

Allowances for credit losses have reached record levels, reflecting suppressed loan provisions as total loan portfolios continued expanding. Gross nonperforming loans also jumped in February to a new high. (Figure 4, upper and lower charts)

For much of the past year, rapid credit growth masked a deterioration in loan quality. The recent surge suggests that this buffer may now be fading—which may help explain the latest regulatory relief measures affecting NPL classification.

Figure 5

Interbank lending has also reached record levels, while repos with other banks remain near historic highs. (Figure 5, upper visual)

Meanwhile, banks increasingly rely on bond and bill borrowings as funding sources rather than traditional deposit growth. (Figure 5, lower image)

Conjointly, these trends resemble a classic “Wile E. Coyote” dynamic from the denominator effect—where balance sheet stresses remain temporarily suspended by rapid credit expansion until underlying conditions eventually reassert themselves.

An oil shock may ultimately expose the fragilities embedded in this dynamic.

VIII. External Risks: Oil and the Strait of Hormuz

These domestic vulnerabilities are unfolding at a time when external risks are rising.

Despite earlier statements about reopening the Strait of Hormuz, Iranian officials appear to have reversed course and announced its continued suspension, raising the risk of disruptions to global shipping along one of the world’s most critical oil transit routes.

For energy-importing economies such as the Philippines, any disruption in Gulf oil flows would amplify domestic inflation pressures and widen trade deficits—further complicating monetary policy decisions.

IX. A System Moving Toward Structural Stagflation

All told, these developments reveal an economy increasingly shaped by persistent and deepening intervention, expanding leverage, and fragile financial balances.

Fiscal authorities attempt to suppress consumer price pressures while raising upstream costs. The central bank maintains hawkish rhetoric while quietly deploying liquidity support measures. Banks rely increasingly on credit expansion and market funding to sustain balance sheets.

The policy framework introduced during the pandemic—once described as temporary emergency stabilization—now appears to have become the operating regime.

Current developments are unfolding broadly in line with the expectations we articulated in June 2025 regarding the government’s response to rising economic pressures.

Without a doubt, the BSP will likely rescue the banks and the government, perhaps using the pandemic template of forcing down rates, implementing reserve requirement ratio (RRR) cuts, massive injections (directly and through bank credit expansion), and expanding relief measures—though likely with limits this time.

If the central bank ultimately resorts to a full revival of its pandemic rescue playbook—aggressive rate cuts, further reserve requirement reductions, and large-scale liquidity injections—the consequences are unlikely to resemble the temporary stabilization achieved in 2020.

Instead, the outcome could be a familiar combination:

a weakening currency or the Philippine peso,
renewed inflation pressures,
rising risk of unemployment,
slowing economic growth, and
rising interest rates.

In other words, the economy may be drifting toward the very outcome policymakers are attempting to avoid—a structurally entrenched stagflationary cycle.

X. Conclusion: The Institutionalization of Crisis Policy

What is emerging in the Philippines is not merely a temporary economic slowdown triggered by external shocks. Instead, it reflects the gradual institutionalization of a policy framework built around continuous crisis management.

Emergency transfers, directed credit programs, regulatory relief, and fiscal expansion have become the populist default responses to economic stress. While each intervention may appear justified in isolation, their cumulative effect is to embed an economic system increasingly dependent on state support.

Over time, such policies weaken market discipline, distort investment decisions, and transfer growing economic risks onto public balance sheets.

As economists Hyman Minsky and János Kornai observed in different contexts, systems sustained by repeated stabilization measures often appear stable until underlying imbalances become too large to contain.

The danger is not simply that stagnation and inflation coexist.

The deeper risk is that a policy regime designed to manage crises may itself become the mechanism through which crisis dynamics intensify.

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

noreply@blogger.com (Unknown) — Sun, 12 Apr 2026 02:56:00 +0000

No government or central bank will admit that rising inflation in essential goods is a direct consequence of financial and fiscal repression, and economic history always shows us that their reaction to rising discontent will be more financial repression and economic intervention—Daniel Lacalle

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

I. The Narrative Lag

II. Stagflation Is Not Just an Oil Story

III. The Deeper Mechanism: Policy-Driven Stagflation

IV. The Monetary Backdrop: Inflationary Pressure Pre-dated the Shock

V. The Philippine Parallel

VI. The Structure of Production: Why Disruptions Spread

VII. What a Binding Price Ceiling Looks Like in Real Time

VIII. The Transmission Phase: Downstream Sectors Feel the Strain

IX. The February Labor “Improvement” That May Not Last

X. Policy Responses Are Expanding

XI. Energy Supply Chains: Why the Shock Is Larger Than Oil

XII. Financial Markets Are Beginning to Reflect the Stress

XIII. Geopolitical Reordering and the Return of the War Economy

XIV. The Stages of Stagflation: A Historical Pattern

XV. The Political Economy of Entrenched Stagflation

XVI. Conclusion: The Adjustment That Has Been Delayed

Stagflation Is Already Here—Emergency Policies Are Now Entrenching It

Rising costs, suppressed prices, and supply withdrawal are spreading distortions across the Philippine economy’s production structure.

I. The Narrative Lag

Public discourse continues to frame stagflation as a future risk—typically linked to external shocks such as oil price spikes—or, at times, dismisses it altogether.

Yet across the Philippines, emerging patterns suggest something more immediate: stagflation is not impending; it is already taking shape and diffusing across sectors.

Rising fuel costs are the visible catalyst, now transmitting through transport, agriculture, fisheries, tourism, retail and so forth. However, the deeper issue is not energy prices per se.

It lies in the interaction between supply shocks and policies that suppress the price signals necessary for adjustment—policies increasingly institutionalized under Executive Order No. 110.

When input costs rise but output prices are constrained, markets cannot equilibrate. Instead of correcting imbalances, the system propagates and amplifies them. Apparent stability becomes artificial and temporary.

Eventually, these suppressed pressures re-emerge. And when supply simultaneously contracts across multiple sectors, the outcome is no longer simple inflation.

It is stagflation.

Recent geopolitical developments further complicate this outlook. The number of armed conflicts worldwide has risen sharply over the past two decades, accompanied by increasing geopolitical tensions and a renewed expansion of defense spending across many economies. This environment increasingly resembles the early stages of past periods in which geopolitical rivalry, fiscal expansion, and supply disruptions interacted with monetary accommodation to generate sustained inflationary pressures. For economies deeply integrated into global trade, energy, and security networks, these dynamics form part of the broader backdrop against which domestic stagflationary risks must be evaluated.

II. Stagflation Is Not Just an Oil Story

The dominant narrative equates stagflation with energy crises. This is analytically incomplete.

There are well-documented cases of stagflation occurring even in the absence of major oil shocks. As economist Frank Shostak argues, stagflation typically arises from the interaction of monetary expansion and supply disruptions, not from relative price changes alone.

An increase in oil prices, by itself, reallocates spending rather than increasing it in aggregate. If the money supply remains unchanged, higher expenditure on energy necessarily reduces expenditure elsewhere. Under such conditions, relative prices shift, but generalized inflation does not automatically follow.

Broad-based and sustained inflation requires monetary accommodation. Without it, price increases in one sector are offset by contractions in others.

This distinction is critical.

III. The Deeper Mechanism: Policy-Driven Stagflation

International experience reinforces this point. Economies such as Argentina, Turkey, and Brazil have repeatedly exhibited a common pattern:

Fiscal dominance constraining monetary policy
Liquidity expansion creating a fiscal–monetary trap
Supply-side rigidities limiting output response
Price suppression and exchange-rate management delaying adjustment

These mechanisms do not merely coincide with stagflation—they produce it.

They allow inflationary pressures to build while simultaneously weakening productive capacity. Growth slows, yet prices continue to rise.

IV. The Monetary Backdrop: Inflationary Pressure Pre-dated the Shock

The current energy shock did not arrive in a monetary vacuum.

Figure 1

Even before geopolitical tensions escalated, liquidity conditions in the Philippines were already accommodative. Data from the Bangko Sentral ng Pilipinas (BSP) indicated that domestic liquidity and credit growth remained elevated as of February, despite signs of slowing economic momentum.

Inflation dynamics reinforce this point. Headline CPI spiraled from 2.4% in February to 4.1% in March, but the uptrend had already been in motion—prices had been increasing for three consecutive months following the November 2025 trough of 1.5%. More tellingly, broad money (M3) growth had reaccelerated from roughly 5% in May 2025 doubling to 10.3% by February 2026. The U.S. WTI crude benchmark reinforced the upward trend. (Figure 1, upper and lower graphs)

In other words, the economy entered the energy shock with inflationary pressure already embedded in the system.

The March CPI spike reinforces our projection that a THIRD wave of inflation is now underway.

At the same time, financial conditions reflected a policy environment leaning more on liquidity support than on productive expansion. Credit growth persisted, but its distribution remained uneven—tilted toward consumption, real estate, and sovereign-linked financing rather than broad-based investment in productive sectors.

Under such conditions, supply disruptions do not result in simple relative price adjustments. Instead, they interact with existing liquidity and fiscal support, amplifying imbalances.

The result is the classic stagflationary configuration: rising costs alongside weakening supply response.

The war did not create these pressures.

It exposed and accelerated them.

V. The Philippine Parallel

The Philippines is beginning to exhibit early signs of a similar dynamic.

Fuel subsidies and price interventions may cushion short-term volatility, but they also dampen the transmission of price signals, delaying necessary adjustments in both consumption and production. In a system already characterized by elevated liquidity, such interventions do not merely stabilize—they compound existing distortions.

When cost pressures are absorbed administratively while liquidity conditions remain accommodative, the adjustment process is deferred rather than resolved.

The trajectory that follows is familiar:

Distortions accumulate beneath the surface
Supply responses weaken as incentives are misaligned
Inflationary pressures persist, even as real activity softens

In this context, rising fuel costs are not the root cause but the trigger—interacting with a policy environment that suppresses signals, sustains liquidity, and ultimately amplifies underlying imbalances.

VI. The Structure of Production: Why Disruptions Spread

To understand how these pressures propagate, it is useful to revisit the structure-of-production framework developed by Carl Menger.

Menger emphasized that production is not a collection of isolated activities, but a layered structure of interdependent stages. He distinguished between:

Higher-order goods — inputs such as fuel, logistics, machinery, and intermediate materials
Lower-order goods — final goods and services consumed directly, including food, transport, and tourism

Disruptions at the level of higher-order goods do not remain contained. They cascade through the production chain, with effects transmitted gradually depending on inventory buffers, contractual rigidities, and the willingness of firms to absorb rising costs.

That lag, however, is finite.

When input costs rise while downstream prices are suppressed, producers face a narrowing set of options:

absorb sustained losses
scale back production
or exit the market altogether

Over time, the first becomes unsustainable and the second insufficient. The third becomes increasingly rational.

What follows is not an immediate price spike, but a progressive weakening of supply capacity—a contraction that eventually surfaces as both rising prices and reduced output.

This is precisely the dynamic now beginning to emerge in the Philippines.

VII. What a Binding Price Ceiling Looks Like in Real Time

The clearest evidence of distortion appears where regulated prices collide with rising costs.

These are the sectors where supply withdrawal begins—not as theory, but as observable behavior.

a. Transport

In Region I, nearly half of public utility vehicles reportedly halted operations as fuel costs surged while fares remained constrained. When operating costs exceed regulated fares, continued operation implies sustained losses. The predictable outcome is reduced service availability, alongside higher logistics costs that transmit directly into the price of goods and basic services.

b. Fishing

Fuel costs have similarly forced about half of the fishers across Luzon to suspend voyages. Comparable dynamics have been observed in other economies, including Thailand and Mumbai India, where fuel shocks—when not accompanied by price adjustment—have temporarily reduced or halted fishing activity.

c. Agriculture

In several regions, farmers are beginning to scale back or abandon harvests as fertilizer, fuel, and transport costs rise faster than farm-gate prices. When input costs outpace realizable output prices, production becomes economically unviable.

This does not only translate into higher food prices. It signals the early formation of a food stress dynamic, where supply contraction and forced consumption substitution reinforce each other across staple goods—raising the risk of an emerging food crisis.

These developments are not isolated disruptions.

Figure 2

They represent the real-time manifestation of a binding price ceiling interacting with supply shocks. (Figure 2, upper window)

Entrenchment begins not when prices rise, but when producers cease to respond to them.

VIII. The Transmission Phase: Downstream Sectors Feel the Strain

Once upstream production weakens, downstream sectors inevitably absorb the impact.

Tourism—highly sensitive to both transport costs and discretionary income—is already being materially affected in key destinations such as Baguio (-50%), Boracay (-31%), Eastern Visayas (-15%), and Hundred Islands National Park (-24%). These declines reflect both rising travel costs and tightening household budgets under persistent price pressure.

Baguio just declared a state of calamity. (Figure 2, lower image)

Rising transport and input costs are compressing demand even as operating expenses continue to increase, producing simultaneous pressure on both revenue and margins.

Cracks in the retail market are becoming increasingly pronounced. Chains such as Marks & Spencer and No Brand have begun scaling back/closing operations in the country. While these decisions predate the current shock, they remain indicative of underlying demand fragility and structural margin compression already present in the system.

Figure 3

This fragility is rooted in developing macroeconomic conditions: slowing real GDP growth, declining per capita income momentum, and an investment structure shaped by prolonged low interest rates and sustained credit expansion. Capital formation has been unevenly directed—toward consumption, real estate, and yield-seeking activities—rather than productivity-enhancing sectors. (Figure 3, topmost and middle visuals)

The crowding-out effects from pandemic-era deficit spending further reinforced these distortions. Sovereign borrowing absorbed a significant portion of available financial resources, reducing the space for private sector investment. This did not only displace capital allocation but also raised the relative cost of funding for productive enterprises, shifting incentives away from long-gestation, productivity-enhancing investment toward short-term consumption and asset-based positioning.

Pandemic-era deficits also contributed to a more centralized allocation of economic resources, increasing the degree of political discretion over investment direction and effectively shifting capital allocation decisions away from decentralized market signals toward administrative and fiscal channels. (Figure 3, lowest chart)

All of these reflect not merely contemporary crowding-out and low-rate-driven misallocation, but a record savings–investment gap/imbalance that has been decades in the making.

The recent corruption scandal highlights how such misallocation, diversion, and capital consumption processes have become structurally embedded

In brief, these concurrent developments magnify the repercussions of existing imbalances.

The result is an economy with limited buffer to cost shocks.

What matters is not any single development in isolation, but their synchronization under a common pressure: rising input costs moving through a system already constrained by policy distortions, uneven capital allocation, and weakened supply responsiveness.

In this phase, the effects of earlier imbalances are no longer latent.

They become visible—simultaneously—in output, prices, and market participation.

IX. The February Labor “Improvement” That May Not Last

These sectoral weaknesses are now beginning to transmit into labor market conditions, albeit with a lag.

At first glance, the February labor report appeared reassuring. Headline employment “improved” and the unemployment rate edged lower (jobless rates eased from 5.8% in January to 5.1% in March. On the surface, the data suggested that the labor market remained resilient despite (pre-war) rising cost pressures.

Figure 4

But a closer look raises questions about whether this improvement represents a durable trend—or merely a statistical pause before broader economic strains surface.

In stagflationary environments, firms initially attempt to absorb rising costs through reduced margins, shorter operating hours, and productivity adjustments in order to preserve employment levels. However, as cost pressures persist alongside weakening demand conditions, adjustment inevitably shifts into the labor market: hiring slows, job quality deteriorates, and informalization increases. Losses spur retrenchment.

Retail and tourism fragility reinforce this transmission channel.

Forthcoming increases in minimum wages should also serve as hindrance to the labor market growth.

External labor dynamics add another layer of vulnerability. Reports of rising overseas worker repatriation suggest that global labor demand conditions may also be softening. For an economy such as the Philippines, which is heavily reliant on overseas employment and remittance inflows, even marginal shifts in external labor absorption can propagate quickly into domestic consumption, liquidity conditions, and household financial stability.

Taken together, these developments indicate that February’s earlier employment “improvement” may represent a temporary statistical noise rather than a structural recovery.

In such environments, labor markets typically lag real economic deterioration: employment initially appears stable even as underlying business conditions weaken beneath the surface. Over time, however, this lag resolves through reduced hiring, declining hours, and weakening job security.

The result is a familiar stagflationary configuration: rising living costs alongside weakening labor conditions and employment quality.

X. Policy Responses Are Expanding

Rather than addressing underlying supply constraints, policy responses have increasingly focused on suppressing visible price adjustments.

Recent measures illustrate this pattern.

The Department of Trade and Industry reached an agreement with meat producers to delay price increases until the end of April.

The Department of Health likewise reached arrangements with pharmaceutical firms to avoid medicine price increases—functioning effectively as negotiated price restraint mechanisms rather than pure market outcomes.

Energy authorities, meanwhile, have warned oil firms against alleged “anti-competitive behavior,” at times framing price movements through cartel narratives. However, such cartel interpretations are better understood as policy-conditioned outcomes rather than purely market-generated coordination, particularly given the limited number of players in the industry and the regulatory structure governing pass-through pricing.

More broadly, the policy stance has shifted in sequence rather than consistency. Authorities initially denied the presence of a systemic crisis, but subsequently imposed a ‘state of emergency’ once pressures became more visible.

In parallel, emergency measures have been floated in public discourse—including fuel rationing and even temporary energy lockdown-type measures—despite public denials of such scenarios.

As Bismarck’s oft-cited dictum suggests, policy signals are sometimes inferred more from what is denied publicly than what is formally declared. In this sense, the sequencing may reflect a form of preparatory signaling or conditioning toward prospective policy tools in the event that conditions deteriorate further.

Fiscal responses have also expanded significantly. Free-lunch populism has prompted the government to allocate approximately Php 238 billion in subsidies and related support measures to cushion households and affected sectors. Within this framework, fuel subsidies for public utility vehicles have recently been extended.

At the same time, structural intervention in the transport sector has intensified through the jeepney servicing and consolidation program, under which operators and drivers are mandated to continue providing services while receiving subsidized compensation.

The state is increasingly assuming coordinating functions in route allocation, dispatch systems, and operational restructuring of jeepney services, effectively centralizing what was previously a decentralized operator-driven system—officially framed as temporary, but carrying the risk of extending state coordination capacity over time, and potentially creating a policy window through which long-desired transport modernization programs could be advanced.

The temporary suspension of WESM operations also raises the possibility of broader shifts in market structure, including partial re-nationalization dynamics in parts of the energy and transport-linked system.

Such episodes align with what economic historians describe as a ‘ratchet effect,’ as theorized by Robert Higgs: temporary expansions of state control and intervention during periods of perceived crisis often persist in modified form even after the shock subsides, gradually shifting baseline institutional arrangements.

While these measures aim to contain visible inflation, price suppression mechanisms rarely eliminate underlying inflationary pressure. Instead, they displace it toward producers, inventories, and fiscal balance sheets, transforming visible price adjustment into structural inflation accumulation across the production system.

XI. Energy Supply Chains: Why the Shock Is Larger Than Oil

Even if geopolitical tensions ease, the structural vulnerability remains.

First, recent diplomatic developments in the Middle East may prove temporary. Historical precedent suggests that ceasefire arrangements in the region have often been fragile, particularly when major powers remain indirectly engaged in the conflict environment. The United States and Israel struck Iran at the end of February, even while negotiations were ongoing.

Second, as former U.S. budget director David Stockman has argued, modern energy systems are not defined solely by crude oil prices but by interconnected refining, logistics, and distribution networks. Liquefied petroleum gas (LPG) and petrochemical supply chains, in particular, rely on tightly coupled processing infrastructure.

Disruptions in these networks propagate far beyond fuel markets, affecting agriculture (fertilizer production), logistics (transport cost structures), manufacturing (input pricing), and services (operating costs).

Energy shocks, therefore, do not remain confined to headline fuel prices.

They transmit through the entire structure of production, amplifying cost pressures across the economy—even in sectors not directly linked to energy consumption.

XII. Financial Markets Are Beginning to Reflect the Stress

Financial indicators are now starting to mirror these real-economy strains.

The Bangko Sentral ng Pilipinas recently reported a decline in gross international reserves (GIR) last March amid lower gold prices, foreign investment outflows and pressure on the peso.

Figure 5

Although the BSP’s headline reserve buffer still appears comfortable, a closer look at composition tells a different story. Non-gold reserves—essentially the liquid foreign-currency assets used to stabilize the peso and finance imports—have declined markedly since late 2024. Rising gold valuations have helped cushion the headline GIR figure, but valuation gains are not equivalent to fresh external inflows. This compositional shift suggests that reserve resilience may be weaker than the aggregate figure implies. (Figure 5, topmost diagram)

Meanwhile, S&P Global Ratings lowered the Philippines’ outlook from positive to stable, citing risks to fiscal and external positions linked to persistent energy-related pressures.

Credit ratings rarely lead markets; more often, they echo or confirm stresses already developing beneath the surface. While not explicitly stated, recent movements in Philippine credit default swaps (CDS), along with a bearish flattening of the yield curve and rising yields across maturities, may have contributed to the revised outlook, reflecting increasing market sensitivity to external and fiscal pressures. (Figure 5, middle and lowest charts)

This evolving bond market dynamic suggests investors are recalibrating their expectations—demanding higher risk premia while simultaneously pricing in weaker forward growth.

Historically, such curve behavior often reflects a policy environment in which monetary conditions remain accommodative while structural growth prospects deteriorate. In this sense, the yield curve may be signaling the same tension visible in the real economy: rising inflation pressures interacting with slowing productive momentum.

XIII. Geopolitical Reordering and the Return of the War Economy

In examining the broader stagflationary risks facing the global economy, it is difficult to ignore a parallel structural shift: the gradual return of what economists historically describe as a war economy.

The stagflationary episode of the 1970s did not arise solely from the oil embargo. It emerged from a broader combination of fiscal expansion, geopolitical conflict, and monetary transformation following the collapse of the Bretton Woods system. The suspension of dollar convertibility during the Nixon Shock effectively loosened the monetary constraints that had previously anchored the international financial system. This shift coincided with large-scale fiscal expenditures associated with the Vietnam War and domestic “guns and butter” policies in the United States.

The subsequent 1973 Oil Crisis then transmitted these underlying monetary and fiscal pressures into global energy markets, transforming what might otherwise have been a relative price shock into a generalized inflationary episode.

Figure 6

Recent developments suggest that elements of this broader geopolitical environment may be re-emerging. Data compiled by the International Monetary Fund indicate that the number of armed conflicts worldwide has risen sharply since the mid-2000s, reaching levels not observed in decades. (Figure 6)

Measures of geopolitical risk have increased in tandem, while the share of countries allocating more than 2 percent of GDP to military spending has begun to climb again after declining during the post–Cold War period.

Such developments do not automatically produce stagflation. However, they signal a structural shift in the global policy environment. Rising defense expenditures, strategic supply chain realignments, and heightened geopolitical rivalry all tend to increase fiscal demands while simultaneously disrupting trade, energy, and commodity flows.

For economies integrated into global security networks, these pressures can have direct domestic implications. The Philippines, as a longstanding client state of the United States and host to several defense cooperation facilities, is not insulated from these dynamics.

Increased defense commitments, strategic realignments in trade and energy flows, and the potential weaponization of financial and technological networks could all influence fiscal policy, investment allocation, and external financial conditions.

While these developments alone do not determine the trajectory of Philippine inflation or growth, they form part of the broader global environment within which domestic stagflationary pressures may evolve.

XIV. The Stages of Stagflation: A Historical Pattern

Stagflation rarely emerges as a fully formed crisis overnight. Historical episodes—from the 1970s United States to more recent cases in Latin America and emerging markets—suggest that the process tends to unfold in stages.

In the initial phase, inflation begins to rise while economic growth slows, typically following a combination of monetary accommodation and supply disruptions. Policymakers often interpret this period as temporary, responding with targeted subsidies, negotiated price restraint, or administrative coordination designed to cushion consumers from visible price increases.

In the second phase, pressures begin to propagate more visibly through the production structure. Producers facing sustained input cost increases and constrained output prices start adjusting operations. Margins compress, inventories decline, and investment slows. Supply responses weaken as firms scale back production or exit markets entirely. Labor markets frequently appear stable during this stage, but job quality deteriorates, hiring slows, and working hours are reduced as businesses attempt to manage rising costs without immediate layoffs.

Only in the later phase does the full stagflationary configuration emerge: persistent inflation combined with visibly weakening economic activity, deteriorating labor conditions, and widening fiscal intervention as governments attempt to stabilize prices and incomes simultaneously.

The developments now visible in the Philippines—sectoral supply withdrawals in transport, fisheries, and agriculture, increasing reliance on subsidies and administrative coordination, and early financial stress signals—suggest that the economy may already be moving through the earlier stages of this historical pattern.

XV. The Political Economy of Entrenched Stagflation

Economic distortions rarely persist because policymakers misunderstand them. More often, they persist because they become politically useful.

Once subsidies, price controls, and administrative coordination mechanisms are introduced, they generate new constituencies whose interests become tied to their continuation. Temporary interventions gradually evolve into institutional arrangements that are difficult to reverse.

As political economist Mancur Olson argued, concentrated interest groups tend to organize effectively to protect benefits, while the broader public—bearing the dispersed costs—faces weaker incentives to mobilize. Policies that begin as crisis responses therefore often survive long after the original shock has passed.

Fiscal incentives reinforce this tendency. Governments facing rising costs and slowing growth frequently prefer policies that postpone adjustment rather than those that impose immediate economic pain. As James Buchanan observed, democratic fiscal systems possess a structural bias toward deficit spending and monetary accommodation, particularly when the costs of such policies are distributed through inflation rather than explicit taxation.

Under such conditions, stagflation can become not merely a cyclical outcome but an institutional equilibrium. Policies intended to suppress inflation in the short run—subsidies, administrative pricing agreements, and coordinated market interventions—gradually weaken the supply responses necessary to stabilize the economy.

The result is a policy environment in which inflation persists, growth weakens, and intervention expands—reinforcing the very dynamics policymakers initially sought to prevent.

XVI. Conclusion: The Adjustment That Has Been Delayed

While the developments described above do not yet constitute a full stagflationary crisis, they reveal the early stages of a process that historically unfolds in recognizable sequence.

Inflationary pressures typically emerge first under conditions of monetary accommodation and fiscal expansion. When supply disruptions occur in such an environment, rising input costs begin to propagate through the production structure. If policy responses attempt to suppress the resulting price signals—through subsidies, negotiated price restraint, or administrative coordination—the adjustment process does not disappear. It simply shifts location.

Instead of being resolved through market pricing, the pressure accumulates within the production system. Producers absorb losses, inventories are drawn down, and investment slows. Over time, supply responsiveness weakens as firms scale back operations or exit markets altogether.

The resulting configuration reflects the interaction of liquidity expansion, fiscal subsidies, and supply disruptions within a system where price signals are increasingly constrained. Demand is sustained through transfers and credit support even as rising costs erode productive capacity. Under such conditions, inflationary pressure does not dissipate; it is displaced—reappearing later through shortages, reduced output, or both.

Many of the mechanisms that historically generate stagflation are therefore already visible in the Philippine economy: rising input costs, sustained liquidity expansion, widening fiscal intervention, weakening supply responses, and increasing reliance on administrative price management.

What appears today as temporary stability may instead represent the delayed adjustment of an economic system whose imbalances are already surfacing.

This adjustment may also unfold within a broader global environment that increasingly resembles earlier stagflationary eras. Rising geopolitical tensions, expanding defense expenditures, and the gradual re-emergence of war-economy dynamics suggest that inflationary pressures may not be purely cyclical.

Rather, they may reflect deeper structural shifts in the international system—shifts that interact with domestic policy distortions and amplify the economic stresses already visible across sectors.

Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II)

noreply@blogger.com (Unknown) — Sun, 05 Apr 2026 01:22:00 +0000

It is particularly odd that economists who profess to be champions of a free-market economy, should go to such twists and turns to avoid facing the plain fact: that gold, that scarce and valuable market-produced metal, has always been, and will continue to be, by far the best money for human society— Murray Rothbard

In this issue

Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II)

I. What the Quiet Actually Means

II. Safe Havens and the Hierarchy of Money

III. The Gold–Oil Ratio and Crisis Transmission

IV. Mean Reversion or Regime Shift? Interpreting the Gold–Oil Ratio

V. Liquidity Stress: When Gold Falls First

VI. Real-Time Example: Central Banks Mobilize Gold, Turkey’s Gold Sales

VII. Real-Time Example: Liquidity Stress in the UAE

VIII. Gold Across Monetary Regimes

IX. Conclusion: The Signal in the Silence

Why Isn’t Gold Acting Like a Safe Haven—Yet? The Gold–Oil Ratio and the Liquidity Stress Behind Early-Crisis Gold Weakness (Part II)

Energy shocks, dollar liquidity stress, and why gold often lags before it leads during financial crises

Part II

I. What the Quiet Actually Means

Part I examined why gold has remained surprisingly subdued despite escalating geopolitical tensions and rising oil prices. The explanation lies not in the failure of gold’s safe-haven role, but in the mechanics of liquidity stress and the structure of the global bullion system.

Part II explores what that quiet may be signaling. By examining the relationship between gold and oil, the liquidity dynamics of financial crises, and gold’s behavior across monetary regimes, a clearer picture begins to emerge.

Gold’s silence may not reflect stability.

It may instead reflect the early stage of a broader liquidity adjustment inside the global dollar system.

While modern financial systems are built on credit rather than metal, periods of stress often reveal that the hierarchy of money still persists beneath the surface.

II. Safe Havens and the Hierarchy of Money

Safe-haven assets are often misunderstood. In practice, they represent savings held in forms with high moneyness—assets expected to preserve value (store of value) while remaining readily marketable during periods of stress.

Their appeal rests on two characteristics: the ability to preserve purchasing power and the ability to be converted into cash quickly with minimal price disruption or marketability.

Crucially, these properties are context-dependent. Assets perceived as safe are not inherently risk-free; their status reflects market confidence in their liquidity and convertibility. U.S. Treasuries, for example, are technically government liabilities, yet they function as safe assets because of their deep, liquid markets and the central role of the dollar in global finance.

Gold occupies a distinct position in this hierarchy. Its moneyness is reinforced not only by the absence of counterparty risk but also by physical characteristics—durability, divisibility, recognizability, and malleability—that historically supported its acceptability across time and geography.

These features contributed to gold’s persistent marketability, particularly in environments where trust in financial intermediaries weakens.

However, as Austrian economist Gary North emphasized, these properties do not constitute intrinsic value. Value is not inherent in the metal itself but is imputed by market participants. Gold’s status as a safe-haven asset therefore arises from sustained confidence in its liquidity and acceptability, especially under conditions of stress.

This hierarchy becomes clearer when markets transition from stability to crisis.

Figure 1

The divergence among major fiat currencies highlights how gold’s moneyness becomes more pronounced as confidence in fiat purchasing power declines. (chart from Jesse Colombo’s The Bubble Bubble Report) [Figure 1]

As described by Hyman Minsky, prolonged financial stability encourages leverage and risk-taking. When stress emerges, this dynamic reverses abruptly. Market participants experience a liquidity squeeze, reprioritizing assets according to their moneyness—favoring those that can be converted into cash quickly and reliably without significant loss of value.

III. The Gold–Oil Ratio and Crisis Transmission

One way to understand gold’s muted response to current geopolitical tensions is through its relationship with oil.

Oil represents an immediate claim on global liquidity. It is consumed, dollar-priced "Petrodollar", and highly sensitive to geopolitical disruption. Gold, by contrast, represents stored value—held primarily as protection against monetary instability.

(Incidentally, oil is often called “black gold,” reflecting its quasi-monetary properties: global acceptability, scarcity, and embedded value as the economy’s primary energy input.)

Figure 2

In real terms, Brent oil’s price trend appears to have formed a secular bottom in the late 1990s around the Asian Financial Crisis. (Figure 2, upper chart)

Since then, the broader trajectory has been upward, interrupted by the 2000s commodity spike and the pandemic collapse. This pattern points to deeper structural forces: monetary expansion, chronic underinvestment in energy, and rising geopolitical risk.

With Middle East tensions intensifying and war-economy dynamics increasingly shaping policy, the current oil shock may prove more persistent than markets expect.

When geopolitical shocks drive oil prices sharply higher, the global financial system experiences a liquidity drain as energy-importing economies scramble for additional dollars to fund higher fuel costs—tightening financial conditions across currencies and credit markets.

With dollar credit estimated at roughly $14 trillion—over half in debt securities (Bank of International Settlement)—this dynamic amplifies dollar demand during periods of stress. [Figure 2, lower image]

This mechanism echoes economist Irving Fisher’s debt-deflation dynamics: rising costs and tightening collateral conditions force economic actors into a dollar funding pressure.

In such episodes, gold does not always rise immediately.

Instead, the gold–oil ratio compresses as oil outpaces gold. The system prioritizes settlement over preservation—dollars are needed to pay for energy before reserves can be accumulated as protection.

Historically, this reflects the early phase of crisis transmission. Energy shocks propagate rapidly through trade balances, currencies, and funding markets, triggering collateral demand that can temporarily suppress traditional hedges.

Only later—once liquidity pressures ease or policy responses take hold—does gold tend to reassert itself.

IV. Mean Reversion or Regime Shift? Interpreting the Gold–Oil Ratio

The gold–oil ratio captures the relative performance of the two commodities; recently, gold has significantly outperformed oil. Heuristically, it can be read as follows:

High ratio: monetary stress, weak growth, disinflationary pressures
Falling ratio (oil catching up): cyclical inflation, supply shocks, rearmament, and stronger industrial demand

If the global economy is transitioning toward a war footing—characterized by higher defense spending, rising commodity intensity, and tightening energy geopolitics—then near-term oil outperformance relative to gold is plausible.

Even in a less oil-dependent world, geopolitical tensions can amplify supply–demand imbalances.

That said, these forces can overlap. Inflationary pressures, financial stress, and supply shocks may coexist rather than unfold sequentially.

Mean reversion suggests scope for oil to outperform gold, with historical anchors around ~18–22 (mean) and ~15–18 (median). However, these benchmarks may no longer be stable.

First, Goodhart’s Law applies: once the ratio becomes a widely targeted signal, its reliability deteriorates.

Second, base effects distort comparisons, especially after extreme moves. When ratios are measured off extreme starting points—such as the pandemic collapse in oil or gold’s surge during periods of monetary stress—subsequent moves can appear disproportionately large or directional. In reality, these shifts may reflect mechanical normalization from distorted bases, rather than a clean cyclical signal.

Figure 3

Third, the apparent gold-oil ratio uptrend since 2008 indicates shifting structural drivers—implying that historical mean/median benchmarks may themselves be drifting higher. (Figure 3)

In short, while mean reversion remains a useful guide, the regime may be evolving—making static historical anchors increasingly unreliable.

It may be that the recent compression in the gold–oil ratio reflects gold’s prior fat-tailed outperformance, with the current move representing a normalization back toward its two-decade trend channel rather than a structural reversal.

V. Liquidity Stress: When Gold Falls First

One of the most counterintuitive features of financial crises is that gold can weaken precisely when investors expect it to strengthen.

This occurs because gold is not only a store of value—it is also one of the most liquid assets in global markets.

When financial stress intensifies, institutions face margin calls, collateral demands, and funding obligations. To meet these pressures, they liquidate assets that can be sold quickly.

Gold often becomes one of those assets.

This reflects the liquidity phase described by Hyman Minsky, in which the immediate need for funding temporarily overrides longer-term investment considerations.

During this stage of a crisis, the system prioritizes cash over protection.

Gold may weaken not because its safe-haven role has disappeared, but because it remains one of the few assets capable of generating immediate liquidity.

VI. Real-Time Example: Central Banks Mobilize Gold, Turkey’s Gold Sales

Figure 4

Recent news reports indicates that Turkey deployed gold-linked lira and foreign-exchange swaps, alongside outright sales, to support the lira during a period of market stress, as the USD/TRY exchange rate surged to successive record highs. Its gold reserves fell by roughly 50 tonnes (to 772 tonnes), the largest decline since 2018. [Figure 4]

Such operations illustrate another dimension of gold’s role in modern reserve management. By mobilizing gold through swaps, central banks can generate immediate foreign-currency liquidity, effectively using gold as a liquidity bridge—complementing direct FX intervention rather than fully substituting for it.

However, these tools primarily address short-term liquidity pressures rather than underlying macroeconomic imbalances.

When markets perceive that a central bank is actively deploying finite reserve assets, these actions can signal constraint—potentially raising risk premia and intensifying pressure on the currency.

As external buffers are drawn down, the policy path often becomes increasingly dependent on domestic liquidity provision, with central banks resorting to expansion of the monetary base to sustain market functioning.

This dynamic highlights the reflexive nature of intervention: measures intended to stabilize markets can amplify fragilities over time through resource misallocation.

Importantly, such actions do not diminish gold’s monetary role. On the contrary, they demonstrate that gold continues to function as high-quality collateral within the global financial system during periods of stress.

VII. Real-Time Example: Liquidity Stress in the UAE

Recent developments in the Gulf financial system offer a contemporary illustration of these dynamics.

Figure 5

Following a sharp collapse in banking liquidity—reportedly approaching 45 percent in parts of the regional funding market—the Central Bank of the United Arab Emirates moved to inject massive amounts of liquidity into domestic banks. [Figure 5, upper diagram]

The intervention aimed to stabilize funding conditions and prevent disruptions in the region’s financial system.

While such measures can temporarily ease liquidity pressures, they also reveal the underlying structure of modern crises. When funding conditions tighten, policymakers must often intervene rapidly to maintain the functioning of credit markets. In the short term, these interventions can strengthen demand for dollar liquidity, particularly in economies closely tied to global energy markets.

The result is a paradox.

Even as geopolitical tensions rise and energy prices surge—conditions that would normally support gold—financial systems may initially prioritize liquidity stabilization over reserve accumulation.

Gold’s subdued behavior during such episodes may therefore reflect not complacency, but temporary pressure within the global funding system.

This dynamic is further illustrated by recent developments in the U.S. dollar. Despite shocks including the U.S.–Israel–Iran conflict, the DXY index has shown muted gains and even diverges from 2-year rate differentials. [Figure 5, lower pane]

This suggests that dollar strength in this period is less about a classic safe-haven bid and more about liquidity demand driven by de-risking and deleveraging.

The lack of coordinated upside in gold, bonds, and bitcoin points to collateral stress rather than a simple flight to safety. Meanwhile, interest rates themselves may reflect not only policy and war risk, but also fiscal pressures and issuance dynamics, blurring the signals that rate differentials typically provide.

In classic safe-haven episodes, defensive assets tend to rise together. When that coordination breaks down, it often signals that markets are prioritizing liquidity and collateral access rather than portfolio hedging.

VIII. Gold Across Monetary Regimes

Figure 6

Gold’s long-term behavior is non-linear. Its bull markets tend to move in waves associated with epochal shifts in global monetary regimes. [Figure 6]

The first bull cycle followed the collapse of the Bretton Woods system after the Nixon Shock and lasted until the early 1980s. This was followed by a bear market and a two-decade lull, reflecting the “salad days” of the U.S. dollar standard—characterized by the rise of globalization, the Fed’s drift toward easy-money policies, and the deepening of the dollar’s exorbitant privilege.

A second wave emerged in the early 2000s and accelerated after the Global Financial Crisis, when central banks dramatically expanded their balance sheets in response to economic shocks.

The current period represents a third phase—marked by a drift toward a war economy: protectionism, sanctions, and kinetic conflict—while also shaped by overlapping forces including evolving monetary policies, the weaponization of the dollar, oil and commodity dynamics, AI-driven structural uncertainty, and central bank accumulation of gold.

These forces are gradually reshaping how gold is accumulated, traded, and—for central banks—deployed within national reserve strategies.

IX. Conclusion: The Signal in the Silence

Gold’s current calm should not be mistaken for irrelevance.

Financial crises rarely begin with a clean flight to safety. Instead, they begin with liquidity stress. Funding markets tighten, institutions scramble for cash, and the most liquid assets are often sold first to meet obligations.

In these early stages, the global financial system prioritizes settlement over preservation. Energy shocks drain dollars from the system, trade balances shift abruptly, and capital flows reprice risk across currencies and credit markets.

This sequence helps explain why gold can appear subdued even as geopolitical tensions escalate. Oil shocks transmit stress through the real economy first, tightening liquidity before investors turn toward long-term stores of value.

Only later—once liquidity pressures ease or policy responses expand—does gold typically reassert its defensive role.

The current compression in the gold–oil ratio may therefore reflect not the failure of gold as a safe haven, but the timing of crisis transmission within a dollar-centric financial system.

If the emerging environment is indeed shifting toward a more fragmented geopolitical order—characterized by energy insecurity, fiscal expansion, de-globalization, kinetic conflicts, and a gradual erosion of monetary trust—then gold’s quiet phase may represent the prelude rather than the conclusion of its cycle.

The signal is not absent.

It may simply be arriving later in the crisis sequence.

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

noreply@blogger.com (Unknown) — Sun, 29 Mar 2026 09:04:00 +0000

Economics does not say that isolated government interference with the prices of only one commodity or a few commodities is unfair, bad, or unfeasible. It says that such interference produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference—Ludwig von Mises

In this issue:

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

I. From Oil Shock to Emergency Response

II. The Rice Policy Template

III. Administrative Pricing Returns: The Suspension of the Power Spot Market

IV. Price Control Proof Is Already in the Streets: Shortages Appear

V. Crisis Messaging and Political Theater

VI. Crony Gains in an Energy Emergency

VII. The Financial Stability Motive

VIII. Markets Push Back

IX. Intervention Begets Intervention

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr.

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure

EO-110 and the Politics of Price Suppression: How the Energy Emergency Is Becoming a Nationwide Economic Intervention

How EO-110, emergency powers, and BSP policy are converging into a nationwide price-control regime.

I. From Oil Shock to Emergency Response

In a previous report, we warned that the Philippines might be entering the early stages of an oil shock.

Events over the past week suggest the policy response is now accelerating.

Within a span of only a few days, the government has rolled out an unusually rapid sequence of interventions.

On March 24, the administration issued Executive Order 110, declaring a national energy emergency.
On March 25, Congress moved to grant emergency authority to suspend fuel excise taxes.
On March 26, the Bangko Sentral ng Pilipinas (BSP) held an off-cycle policy meeting and decided to keep interest rates unchanged.

Each step has been framed as an effort to protect consumers from the impact of rising energy costs.

Yet taken together, they reveal something broader: the emergence of an integrated policy approach aimed at suppressing the economic transmission of the oil shock.

This strategy is not entirely new.

It closely resembles the template already deployed in another politically sensitive sector—rice.

II. The Rice Policy Template

Over the past year, rice policy has increasingly relied on administrative intervention.

The government imposed maximum suggested retail prices (MSRP), released reserves through the National Food Authority, introduced the highly publicized Php 20 rice program, and deployed fiscal subsidies to farmers and importers.

In effect, the state has attempted to contain consumer prices by transferring costs elsewhere—through fiscal spending, balance-sheet adjustments, and administrative supply management.

Public choice theorists such as James M. Buchanan and Geoffrey Brennan in The Power to Tax describe this phenomenon as fiscal illusion: the obscuring of the true cost of government through indirect financing—such as borrowing, inflation, or off-budget transfers—allowing policymakers to sustain the appearance of relief while shifting the burden forward.

This same policy template now appears to be extending into energy markets.

The national response to the oil shock has included:

Suspension of transport fare increases
fuel subsidies for operators
intensified price monitoring and enforcement
emergency procurement of oil supplies
the suspension of fuel excise taxes
intervention in electricity markets to contain price spikes

Demands for price controls are also broadening, now encompassing LPG and imported rice.

As with the rice program, these measures aim to soften the visible price impact of scarcity—while redistributing the underlying costs across the fiscal system and the broader economy.

Figure/Table 1

Policy intervention appears to be expanding sector by sector. Measures initially introduced to stabilize politically sensitive goods are gradually extending into energy markets and financial policy. (Table 1)

III. Administrative Pricing Returns: The Suspension of the Power Spot Market

The spread of price suppression is not limited to transport fuels.

On March 25, the Energy Regulatory Commission ordered the temporary suspension of the Wholesale Electricity Spot Market (WESM) across the Luzon, Visayas, and Mindanao grids after simulations suggested electricity prices could surge to around ₱9 per kilowatt-hour amid the Middle East energy shock.

The WESM is the Philippines’ real-time electricity trading platform, where elite owned and controlled power producers and distributors buy and sell electricity based on supply and demand conditions. Prices in this ‘caged’ market normally fluctuate to reflect fuel costs, generation capacity, and grid constraints.

By suspending the market, regulators effectively replaced price discovery with administrative allocation.

The objective is straightforward: prevent a sudden spike in electricity prices from feeding into consumer inflation.

But the economic implications are significant.

Spot markets exist precisely to coordinate supply and demand under changing conditions. When prices rise, they signal scarcity and encourage additional generation or conservation.

Administrative suspension interrupts that signal.

Instead of electricity being allocated through price adjustments, dispatch decisions increasingly become centralized—determined by regulatory directives rather than market incentives.

The result may temporarily contain visible price increases, but it also risks creating deeper distortions in the power sector.

Power producers must now operate under uncertain compensation conditions, while distributors and large consumers lose the market signals that normally guide electricity procurement.

In effect, one of the country’s most important energy markets has been replaced—at least temporarily—by administrative pricing.

This development reinforces a broader pattern emerging across sectors: the gradual substitution of price mechanisms with regulatory control.

But suppressing prices does not eliminate the underlying imbalance between supply and demand.

As Friedrich Hayek famously argued in The Use of Knowledge in Society, prices function as signals coordinating dispersed knowledge across the economy. Suspending markets may suppress volatility, but it also suppresses the information that allows the system to adjust.

If we can agree that the economic problem of society is mainly one of rapid adaptation to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them

Or suppressing those signals inevitably disrupts the coordination process. It also shifts the adjustment to other parts of the economy.

Yet authorities have not only suspended WESM; they are reportedly considering permanently repealing the only partially deregulated segment of the energy sector, as well as the removal of VAT. Both measures may provide temporary relief, but such band-aid solutions carry the risk of future unintended consequences.

Moreover, while reducing taxes may be desirable, without corresponding spending constraints this approach would likely worsen fiscal deficits and heighten the fragility of public finances.

In effect, short-term interventions may shield consumers today, but they also deepen structural vulnerabilities that could amplify costs tomorrow.

IV. Price Control Proof Is Already in the Streets: Shortages Appear

Basic economic theory predicts that price ceilings eventually produce shortages.

Early signs of this dynamic are already emerging.

Reports indicate that more than 400 gasoline stations have temporarily closed, citing supply difficulties even as authorities insist that fuel inventories remain sufficient.

Public transport is showing similar strains.

Jeepneys in Quezon City and bus operators in Metro Manila (about 20%) and Baguio City (up to 50%) have significantly reduced operations, with stranded commuters and growing protests highlighting the mismatch between controlled fares and rising fuel costs.

As an aside, this is just the first few days!

Despite subsidy rollouts, the economics of operating public transport under capped fares have become increasingly difficult.

Figure 2

The result is a classic outcome described in the literature on price ceiling: supply contraction rather than price adjustment. (Figure 2, upper window)

Retail markets are beginning to reflect the same pressures.

Supermarkets and some food manufacturers have signaled price increases beginning April 1, reversing a March commitment to uphold a temporary two-month price freeze. The Department of Trade and Industry (DTI), however, insists that any price adjustments should not take effect until April 16.

In the aviation sector, the pattern has been equally revealing.

After the president warned that aircraft might be grounded if fuel shortages worsened, Philippine Airlines assured the public that jet fuel supplies were sufficient for the ‘foreseeable future.”

Shortly afterward, the airline quietly cut several domestic and international flight routes suggesting fuel conservation moves.

These episodes illustrate a recurring feature of interventionist policy regimes: the widening gap between official reassurance and market behavior.

V. Crisis Messaging and Political Theater

Public messaging surrounding the energy situation has evolved rapidly.

Initially, officials emphasized that there was ‘no energy crisis.’

More recently, the government has declared an energy emergency while simultaneously insisting that there is still no reason to panic.

The pattern echoes a famous observation often attributed to Otto von Bismarck:

never believe anything until it has been officially denied.

Policy actions suggest a far more serious assessment than the rhetoric implies.

Authorities have begun cracking down on alleged fuel hoarding, floated the possibility of repealing elements of the country’s oil deregulation law, and raised the prospect of removing the value-added tax on petroleum products (as noted above).

At the extreme end of the policy spectrum, discussions have even surfaced about the possibility of an energy lockdown should supply conditions deteriorate further.

As political economist Albert O. Hirschman observed in The Rhetoric of Reaction, crisis politics often produces a distinctive rhetorical pattern: policies framed as temporary necessities gradually become permanent features of governance.

Taken together, these measures suggest a steady expansion of administrative control not only over the energy sector, but more broadly across society.

VI. Crony Gains in an Energy Emergency

While the policy framework emphasizes consumer protection, the distribution of benefits within the energy sector tells a more complex story.

Several large corporate groups appear poised to gain from the shifting landscape.

Petron Corporation, a subsidiary of San Miguel Corporation (SMC), has reportedly sourced discounted Russian crude, including last week’s shipments of roughly 700,000 barrels.

At the same time, Tycoon and SMC chair, Ramon S. Ang has revived proposals for the government to acquire Petron—a move that could effectively transfer part of the firm’s humungous debt burden onto the public balance sheet.

Such a shift reflects what Gordon Tullock described as rent-seeking dynamics: firms capture gains during favorable market conditions, yet seek to socialize losses when the cycle turns. Private upside, public downside.

Other developments point in a similar direction. Amid public pressure against coal, policymakers have signaled support for its “temporary” expansion under the banner of energy security—even as official rhetoric continues to favor renewables.

Despite its political unpopularity, Department of Energy data indicate that coal accounted for an all-time high 62% of gross power generation in 2024. (Figure 2, lower image)

A subsidiary of Manila Electric Company, Meralco PowerGen Corp. (MGEN), has reportedly expressed interest in assets linked to Semirara Mining and Power Corporation (PSE: SCC).

Notably, some of these assets had already been subjected to regulatory or contractual rebidding processes prior to the current crisis.

In that context, the present moment may be less a sudden policy shift than an acceleration of an existing trajectory—one in which administrative actions reshape ownership and market structure. The result is a coal sector that may not only revive, but consolidate under a few hands through policy-mediated channels.

Meanwhile, announcements surrounding the Camago-3 field within the Malampaya Phase 4 gas field development have been presented as evidence of incoming domestic supply. Yet such projects typically take years to materially affect output, and gas contracts remain indexed to global prices. Absent subsidies, price relief is unlikely in the near term. For now, these announcements function more as reassurance than resolution.

While the timing of benefits to consumers remains uncertain, the consortium—particularly Tycoon Enrique Razon led Prime Energy—is clearly positioned to capture upstream gains

As Mancur Olson observed in The Rise and Decline of Nations, crises tend to strengthen “distributional coalitions”—organized interests that secure concentrated benefits while dispersing costs across the broader public.

The pattern is hardly new. Frédéric Bastiat, in The Law, warned that when the state becomes an instrument for particular interests to extract from the public, law itself is transformed—from a protector of rights into a vehicle for legalized transfer.

The emerging picture suggests not merely an energy response, but a reconfiguration of advantage. The beneficiaries appear to be those corporate groups already positioned to consolidate and potentially cartelize segments of the country’s energy supply chain.

In effect, the crisis is not only redistributing costs—it also seems to be concentrating access to resources, decision-making power, and control in fewer hands.

VII. The Financial Stability Motive

The government’s intervention in energy and monetary policy may extend beyond protecting consumers.

Energy shocks transmit rapidly through the financial system: higher fuel prices feed into consumer inflation, which in turn pressures the central bank to tighten policy. The BSP recently revised its 2026 inflation forecast to 5.1%—well above its 2–4% target, underscoring the magnitude of underlying price pressures. Rising interest rates reduce asset valuations and weaken collateral across the banking system.

Figure 3

As an aside, the BSP’s 5.1% 2026 inflation forecast reveals much about their expectations. With January and February CPI at 2% and 2.4%, this implies that the average CPI for the remaining ten months would need to reach roughly 5.68%. Such a trajectory would push monthly CPI above 6%, potentially testing or exceeding the 8.7% high recorded in February 2023! If realized, this would reinforce what appears to be our long projected third wave of the CPI cycle since 2015. (Figure 3, upper graph)

Banks in the Philippines are heavily exposed to property lending and government securities. A rapid rise in rates could trigger cascading balance-sheet pressures—falling bond prices, declining property valuations, and rising non-performing loans. From this perspective, suppressing the visible impact of the oil shock may help delay financial tightening.

The BSP’s off-cycle decision to hold policy rates steady has been widely interpreted as part of this stabilization effort. Officials from the Bureau of the Treasury have acknowledged or admitted that maintaining stable borrowing conditions in the bond market was an important consideration.

In effect, the policy response aims to keep inflation, interest rates, and asset prices contained simultaneously.

These constraints are consistent with the structural limitations faced by semi-peripheral economies. The Philippines’ persistent savings–investment gap makes it reliant on external capital, which limits independent monetary policy and exposes the financial system to global market pressures. As Giovanni Arrighi observed, countries in the semi-periphery are structurally dependent on foreign financing and currency, leaving central banks with limited room to maneuver.

The BSP is therefore not simply choosing between “good” and “bad” options; it is deciding which part of the balance sheet to protect first.

VIII. Markets Push Back

Financial markets rarely remain passive. The US dollar–Philippine peso exchange rate has surged to a record 60.55, marking a historic low for the peso.

At the same time, government bond yields—particularly in the one- to seven-year segment—have moved decisively higher, underscoring growing unease about fiscal stability and inflation risks. (Figure 3, lower chart)

Although Philippine equity markets have declined, trading patterns suggest that downside volatility is being deliberately managed, or at least cushioned, within the heavily weighted components of the PSEi-30 index.

The market’s verdict appears clear: the Bangko Sentral ng Pilipinas (BSP) is likely to absorb external pressures through currency adjustment rather than aggressive rate hikes and use of reserves, constrained by fiscal realities.

Inflation is nearing 5%, with second-round effects increasingly visible across transport, food, fertilizer, and electricity costs. These pressures are no longer isolated—they are feeding into broader economic feedback loops.

Meanwhile, signs of strain are becoming more evident across the broader economy.

The retail sector continues to undergo restructuring. Marks & Spencer has withdrawn its operations despite earlier signals of recalibration, while Robinsons Retail has announced the closure of its No Brand outlets. The conglomerate is also reportedly considering the possibility of delisting from the Philippine Stock Exchange.

Taken together, these developments may reflect more than isolated corporate decisions. They point to a tightening environment for both consumers and listed firms, as financing conditions gradually shift and economic pressures intensify.

IX. Intervention Begets Intervention

Figure/Table 4

Intervention often follows a self-reinforcing cycle. Initial controls distort market signals, producing shortages that then justify further administrative action. (Figure 4)

The trajectory of recent policy decisions follows a pattern long recognized in economic theory.

Austrian economist Ludwig von Mises argued that partial government intervention in markets tends to generate unintended distortions that eventually require additional intervention.

Wrote the great von Mises

Price control is contrary to purpose if it is limited to some commodities only. It cannot work satisfactorily within a market economy. The endeavors to make it work must enlarge the sphere of the commodities subject to price control until the prices of all commodities and services are regulated by authoritarian decree and the market ceases to work.
Either production can be directed by the prices fixed on the market by the buying or the abstention from buying on the part of the public; or it can be directed by the government’s offices. There is no third solution available. Government control of a part of prices only results in a state of affairs which—without any exception—everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest.

The preeminent Dean of Austrian School of Economics, Murray Rothbard’s concept of triangular intervention helps explain how regulating one set of exchanges can distort others, setting off a chain of interventions across sectors.

A triangular intervention occurs when an intervener either compels a pair of people to make an exchange or prohibits them from making an exchange. The coercion may be imposed on the terms of the exchange or on the nature of one or both of the products being exchanged or on the people doing the exchanging…
Directly, the utility of at least one set of exchangers will be injured by the control. Indirectly, as we find by further analysis, hidden, but just as certain, effects injure a substantial number of people who thought they would gain in utility from the imposed controls. The announced aim of a maximum price control is to benefit the consumer by giving him his supply at a lower price; yet the objective effect is to prevent many consumers from having the good at all. The announced aim of a minimum price control is to insure higher prices to the sellers; yet the effect will be to prevent many sellers from selling any of their surplus. Furthermore, the price controls inevitably distort the production and allocation of resources and factors in the economy, thereby injuring again the bulk of consumers. And we must not overlook the army of bureaucrats who must be financed by the binary intervention of taxation and who must administer and enforce the myriad of regulations. This army, in itself, withdraws a mass of workers from productive labor and saddles them onto the remaining producers—thereby benefiting the bureaucrats, but injuring the rest of the people.

More broadly, the expansion of state authority during crises was famously analyzed by historian Robert Higgs, who observed that emergency conditions often lead to permanent increases in government control over economic activity.

The emerging policy response to the oil shock appears to be following this familiar path.

Price controls lead to shortages.
Shortages trigger enforcement actions.
Enforcement expands administrative authority.
Administrative authority creates new political and economic beneficiaries.

The cycle then repeats.

X. Echoes of the Energy Crisis—Marcos Sr. vs Marcos Jr.

The Philippines has confronted energy shocks before. But the institutional setting of the crisis today differs profoundly from the one that shaped the policy response half a century ago.

During the global oil shocks of the 1970s—particularly the 1973 Oil Crisis and 1979 Oil Crisis—the Philippines was already operating under authoritarian rule. Ferdinand Marcos Sr. had declared Martial Law in the Philippines in September 1972, consolidating political power and weakening institutional checks on executive authority.

Energy policy therefore unfolded within a centralized political system capable of imposing controls, directing credit, and reorganizing industries with limited resistance.

The current oil shock, by contrast, is unfolding under the presidency of Ferdinand Marcos Jr. within a formally democratic political structure. Instead of authoritarian command, policy is emerging through a rapid layering of interventions—executive orders, emergency powers, regulatory suspensions, subsidies, and monetary accommodation.

This difference matters.

Figure/Table 5

Energy shocks have struck the Philippines under both Marcos administrations. The key difference lies in the institutional pathway of intervention: centralized command under martial law in the 1970s versus layered regulatory and fiscal intervention within a democratic framework today. (Figure/Table 5)

In the 1970s, authoritarian institutions allowed the state to impose controls directly and sustain them over time. Today, similar economic objectives must be pursued through a more fragmented political process involving subsidies, administrative pricing, and financial policy coordination.

Yet the economic trajectory may still converge.

The interventionist policies of the 1970s ultimately culminated in the Philippine external debt crisis of 1983, when mounting fiscal deficits, rising external borrowing, and weakening investor confidence forced a restructuring of sovereign obligations.

Today’s macroeconomic backdrop exhibits its own form of imbalance.

Fiscal deficits remain historically elevated. Public debt has risen sharply relative to national output. Liquidity conditions—reflected in rapid monetary expansion and sustained deficit financing—have reached levels rarely seen in the country’s economic history.

Measured as shares of GDP, many of these indicators appear manageable. But GDP itself increasingly reflects government spending and credit expansion rather than productivity growth.

In that sense, the underlying dynamics bear an uncomfortable resemblance to the earlier era.

The key difference is speed.

During the 1970s, the accumulation of distortions took years to unfold. Today, early symptoms are appearing within days of the policy response.

Transport shortages are already emerging only days after the declaration of the energy emergency. If such distortions persist, the policy logic may lead to further escalation: larger subsidies, deeper price controls, emergency procurement programs, and expanding administrative authority.

Economic crises have historically been fertile ground for political centralization. Severe shocks—whether economic, geopolitical, or social—often generate the conditions under which governments justify extraordinary powers.

The Philippines’ current constitutional framework imposes safeguards against such outcomes. Yet history also shows that institutional constraints can erode rapidly under sustained crisis conditions.

Whether today’s oil shock remains an economic problem—or evolves into a broader political one—will depend less on official assurances than on the incentives shaping policy decisions in the months ahead.

XI. Conclusion: Suppressing Scarcity, Shifting the Pressure

The oil shock may only be the beginning. EO-110 could come to be seen not as a solution, but as the opening phase of a broader cycle of intervention.

From rice to fuel, from transportation to energy markets, policy is increasingly aimed at suppressing how rising costs flow through the economy—seeking to contain inflation, stabilize financial conditions, and preserve asset values.

Yet economic reality rarely accommodates such efforts for long. Suppressing prices does not remove scarcity; it merely redirects it. The adjustment reemerges elsewhere—through fiscal strain, currency pressure, supply disruptions, or financial instability.

The Philippines may therefore be entering not just an energy emergency, but a wider economic experiment: an attempt to delay market adjustment through expanding intervention. History suggests these efforts seldom end as intended.

The real question is no longer whether adjustment will occur—but where the pressure will surface next.

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

noreply@blogger.com (Unknown) — Mon, 23 Mar 2026 00:55:00 +0000

The picture of the free market is necessarily one of harmony and mutual benefit; the picture of State intervention is one of caste conflict, coercion, and exploitation—Murray N. Rothbard

In this issue:

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

I. Crisis Without a Crisis

II. Oil Shock Politics and Organized Interests

III. The Ratchet Effect of Crisis Policy

IV. The Oil Shock Is Already Affecting the Real Economy

V. When Price Signals Are Suppressed

VI. Interventions Beget Interventions

VII. Markets Are Already Responding

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility

Philippine Oil Shock Politics Meets Systemic Fragility: Crisis Without a Crisis and a Deepening Web of Interventions

“Crisis Without a Crisis”: As officials urge calm, subsidies, price caps, and emergency policies spread across the economy.

I. Crisis Without a Crisis

The Marcos administration is urging the public not to panic: "Everything is normal. No need to hoard."

Officials have repeatedly warned consumers against hoarding while insisting that the Philippine economy remains stable despite the surge in global oil prices.

Yet the government’s own policy actions suggest a very different reality.

Within days of the oil shock, authorities introduced a rapidly expanding set of interventions across multiple sectors of the economy:

fuel subsidies for transport operators, with discussions of extending support to commuters
suspension of public transport fare increases
50 percent fare discounts for MRT and LRT passengers
suspension of toll rate hikes and applying steep discounts
investigations into gasoline stations accused of overpricing, imposing early unauthorized price hikes, and carrying out sudden closures
voluntary price freezes from processed food manufacturers
discussions on imposing price caps on imported rice
plans to suspend mandatory biofuel blending requirements
and signals from the Palace that a state of emergency remains under consideration

At the same time, the political debate is widening.

Senator Tito Sotto has filed legislation to repeal the Oil Deregulation Law, while economist Winnie Monsod has proposed a wealth tax to finance expanding subsidies.

Taken together, these measures resemble a broad attempt to suppress the transmission of rising energy costs throughout the economy.

But the deeper story may lie in the political incentives behind such policies.

II. Oil Shock Politics and Organized Interests

The response to the oil shock reflects dynamics long described by political economist Mancur Olson.

In Olson’s theory of collective action, small, well-organized interest groups often exert disproportionate influence over economic policy. Because their benefits are concentrated while the costs are widely dispersed, these groups are able to secure subsidies, protections, or regulatory advantages from government.

Energy shocks tend to accelerate this process. Some examples:

Transport operators seek subsidies to offset fuel costs.
Food producers lobby for relief from input price pressures.
Agricultural sectors push for price supports.
Infrastructure operators also seek regulatory relief when shocks threaten profitability.

For instance, the Energy Regulatory Commission (ERC) is considering power rate adjustments in April that would allow utilities to recover rising generation costs and financial losses. Similar pressures have already appeared in earlier policy discussions—from real property tax (RPT) relief for power producers to increased GEA-All subsidies benefiting renewable producers, as well as negotiated asset transfers in the SMC–Meralco–AEV energy deal—illustrating how fragile sectors increasingly rely on regulatory protection when market conditions deteriorate.

Each group frames its demands as necessary for stability, employment, or consumer protection.

The result is an expanding patchwork of sector-specific interventions.

Individually, each measure may appear justified. Collectively, however, they create a growing system of economic management in which prices and incentives are increasingly shaped by political decisions rather than market signals. The result is an expanding patchwork of sector-specific interventions. Intensifying competition for public resources drives rising demands for government spending, crowding out the productive economy and accelerating the centralization of the economy.

III. The Ratchet Effect of Crisis Policy

Economic historian Robert Higgs described a recurring pattern in government responses to crises: what he called the "ratchet effect."

During emergencies—wars, financial crises, pandemics, or commodity shocks—governments introduce extraordinary interventions to stabilize politically sensitive sectors of the economy. These measures are typically framed as temporary responses to exceptional circumstances.

Yet once the crisis subsides, the state rarely returns fully to its previous size or scope.

Instead, some interventions remain in place, while others leave behind new fiscal commitments, regulatory authorities, or political expectations of continued support. Each crisis therefore pushes the boundary of government involvement forward in a stepwise fashion—much like a mechanical ratchet that moves only in one direction.

The Philippines’ pandemic episode illustrates this dynamic clearly.

Figure 1

During the COVID crisis, fiscal deficits widened to record levels, justified as emergency stimulus designed to cushion the economic collapse. (Figure 1, upper window)

Yet much of that spending expansion became structurally embedded in the fiscal framework. Political pressures for continued subsidies and transfers, created under the purview of social democratic free-lunch politics, have made these programs difficult to unwind even after the emergency has passed.

As a result, the country’s savings–investment gap widened to unprecedented levels, financed by historically high public borrowing and still-elevated liquidity conditions, as reflected in measures such as the M2-to-GDP ratio. These dynamics have increased the economy’s sensitivity to inflation while intensifying crowding-out pressures already evident in domestic output, consumption, and credit markets.

Energy shocks historically amplify this ratchet dynamic.

Subsidies introduced to stabilize transport costs become permanent programs. Temporary price controls evolve into long-term regulatory oversight. Emergency fiscal transfers create new political expectations that governments will shield key sectors from market fluctuations.

The Philippine response to the current oil shock risks reinforcing this pattern. Policies such as fare subsidies, price caps, toll suspensions, and regulatory enforcement may begin as short-term measures to contain inflation and social unrest.

But once introduced, they often prove politically difficult to reverse.

Over time, repeated crisis interventions accumulate into a broader system of economic management—expanding the role of the state while leaving the underlying structural vulnerabilities unresolved.

IV. The Oil Shock Is Already Affecting the Real Economy

Signs of strain were emerging.

Automobile sales had already begun to decline, even before the latest surge in oil prices, suggesting that rising fuel costs have yet to add to the erosion of discretionary consumption. (Figure 1, lower chart)

Transport activity is now reflecting the same pressures.

Reports indicate that the MMDA expects vehicle traffic in Metro Manila to decrease by around 30,000 units. Meanwhile, bus trips at the Parañaque Integrated Terminal Exchange (PITX) have dropped significantly, as operators scale back services and commuters reduce their travel.

Air travel is also absorbing the shock. Airlines have begun imposing higher jet fuel surcharges, raising the cost of domestic and international flights.

The shock is also beginning to affect overseas labor flows. Filipino workers continue to be repatriated from conflict areas in the Middle East, with roughly 2,000 overseas Filipino workers (OFWs) already returning to the country. While still modest in scale, such movements highlight another channel through which geopolitical shocks can affect the Philippine economy. Remittances from OFWs have long served as a stabilizing source of foreign exchange for the peso. Disruptions to overseas employment—particularly in energy-sensitive regions—therefore risk amplifying pressures already visible in labor, currency and financial markets.

These adjustments illustrate the normal transmission mechanism of an energy shock: rising fuel prices ripple through transport, logistics, and consumer spending.

Instead of allowing those adjustments to occur through price changes, the government is intervening across multiple points in the transmission chain.

V. When Price Signals Are Suppressed

Economists such as Friedrich von Hayek emphasized that prices function as a decentralized information system: "the knowledge of the particular circumstances of time and place."

Prices communicate knowledge about scarcity, costs, and consumer preferences across millions of economic actors.

When governments suppress those signals—through fare freezes, price caps, subsidies, or regulatory pressure—the information embedded in prices becomes distorted.

Consumers may continue to demand goods whose true costs are rising.

Producers may reduce supply when prices no longer cover costs.

Adjustments that would normally occur through prices instead emerge as reduced service, shortages, declines in quantity or quality, and even fiscal transfers.

In this sense, partial price controls recreate elements of the problem identified by Ludwig von Mises in his critique of socialist planning: when prices are manipulated, rational economic calculation becomes increasingly difficult. As the great Mises explained,

Without calculation, economic activity is impossible.

VI. Interventions Beget Interventions

Once price controls begin to distort economic signals, additional interventions often follow.

This dynamic was emphasized by Murray Rothbard, who argued that government interventions frequently generate secondary effects that policymakers then attempt to correct with further interventions.

Fare caps create losses for transport operators, prompting subsidies.
Price freezes create supply pressures, prompting enforcement actions.
Rising fiscal costs generate calls for new taxes or regulatory changes.

Each policy attempts to fix the unintended consequences of the previous one.

Over time, what begins as a limited intervention can evolve into a broad regime of economic management, representing a gradual transition toward centralization. As the dean of Austrian economics, the great Murray Rothbard wrote,

Whenever government intervenes in the market, it aggravates rather than settles the problems it has set out to solve. This is a general economic law of government intervention.

VII. Markets Are Already Responding

While policymakers attempt to stabilize prices and shield consumers from the oil shock, financial markets appear to be reacting to the broader macroeconomic implications.

Figure 2

The PSEi 30, the primary equity benchmark of the Philippine Stock Exchange, has declined, although the drop has been relatively muted—likely reflecting institutional support and collateral management dynamics. (Figure 2, topmost graph)

Other markets are sending a more cautionary signal. The peso has weakened significantly, with the USD/PHP exchange rate reaching a record high of 60.1 this week, making it one of the worst-performing currencies in Asia.

At the same time, the government bond market has undergone a structural shift.

Philippine Treasury yields have moved from bearish flattening to bearish steepening, with long-term yields rising faster than shorter maturities over the past week. Such shifts often reflect growing concerns about inflation persistence, fiscal sustainability, or sovereign risk. (Figure 2, lower chart)

Figure 3

As of March 19, Philippine 10-year Treasuries ranked as the worst-performing bond market segment in Asia (Figure 3, upper table)

Although the current spike in T-bill yields may not yet prompt a response from the BSP, it is important to note that its policies are shaped more by market developments than by its own actions. The directional movement of one-month T-bill yields has historically preceded BSP policy shifts, including rate cuts in 2018 and 2023–2024, and rate hikes in 2022. (Figure 3, lower image)

Thus, if the upward trajectory of T-bill rates persists, rate hikes are likely to come onto the BSP’s radar.

Figure 4

These concerns are not unfounded. The Philippines already faces record debt-service burdens amid persistent fiscal deficits. (Figure 4, topmost pane)

Expanding subsidies and price controls risk adding further pressure on the government’s balance sheet.

According to ADB data, the Philippines has recorded the largest increase in credit default swap (CDS) spreads since the outbreak of the Middle East conflict—indicating that markets are pricing in higher default risk for Philippine debt. (Figure 4, middle and lower charts)

VIII. Conclusion: Deepening Interventions Intensify Systemic Fragility

What is unfolding may not simply be a temporary response to a spike in global oil prices.

Rather, the episode illustrates how modern interventionist economies evolve when confronted with external shocks.

As Mancur Olson observed, mature political systems tend to accumulate powerful distributional coalitions—organized groups capable of securing targeted protections, subsidies, and regulatory advantages from the state. Energy shocks often accelerate this process as sectors facing sudden cost increases mobilize to shift those costs elsewhere.

The result is a widening network of state interventions designed to stabilize politically sensitive sectors.

But crisis interventions rarely remain temporary. Economic historian Robert Higgs described this dynamic as the ratchet effect: during periods of emergency, governments expand their role in managing the economy, and once the crisis passes, those powers rarely return fully to their previous limits.

Each shock therefore leaves behind a larger structure of fiscal commitments, regulatory authority, and political expectations of continued support.

Once prices begin to be suppressed in this way, the informational role of markets deteriorates—a problem emphasized by Friedrich Hayek. Prices no longer convey reliable signals about scarcity and cost, making economic coordination increasingly difficult.

This is where the broader critique developed by Ludwig von Mises becomes relevant. When governments repeatedly intervene to correct the unintended consequences of earlier policies, economic management gradually expands across more sectors of the economy. Mises described this process as the dynamic of interventionism—a cycle in which policy distortions generate new problems that invite further intervention.

The Philippine response to the oil shock increasingly reflects this pattern.

Fare caps require subsidies.
Price freezes invite enforcement.
Rising fiscal costs trigger proposals for new taxes or regulatory changes.

Each populist band-aid policy attempts to stabilize the distortions created by the previous one.

What emerges is not a single intervention but an expanding system of economic management—one reinforced by the ratchet effect of successive crises.

And when such systems face external shocks—particularly commodity shocks that simultaneously affect inflation, trade balances, and fiscal accounts—the pressures tend to migrate toward the weakest macroeconomic points: the government’s fiscal position, the sovereign debt market, and the currency.

The oil shock may therefore be revealing something deeper about the Philippine economy.

Rather than simply confronting higher energy prices, policymakers appear to be navigating the accumulated tensions of an interventionist regime already stretched across multiple sectors—and increasingly across the economy as a whole.

Suppressing the immediate price effects of the shock may buy time—but it also risks amplifying underlying maladjustments.

Importantly, it cannot eliminate the adjustment the economy must eventually make. At best it postpones that process, increasing the risk that the eventual correction will be larger and more disorderly.

And markets—especially currency and sovereign bond markets—tend to recognize that reality long before policymakers do.

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

noreply@blogger.com (Unknown) — Sun, 22 Mar 2026 00:13:00 +0000

Nations have scoured the earth for gold in order to control others only to find that gold has controlled their own fate. The gold at the end of the rainbow is ultimate happiness, but the gold at the bottom of the mine emerges from hell. Gold has inspired some of humanity's greatest achievements and provoked some of its worst crimes. When we use gold to symbolize eternity, it elevates people to greater dignity—royalty, religion, formality; when gold is regarded as life everlasting, it drives people to death—Peter L. Bernstein

In this issue

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

I. The Muted Signal

II. Two Gold Markets

III. The Clearing Infrastructure

IV. When Logistics Stress Becomes Financial Stress

V. The Collateral Squeeze

VI. The Dollar as Lightning Rod

VII. Fragmentation, Not Failure

VIII. What the Quiet Is Actually Saying

VIIIA. Post Script: "There is No Haven"

Why Isn’t Gold Acting Like a Safe Haven—Yet? War, Liquidity Stress, and the Fracturing of the Bullion System (Part I)

Oil is surging, the dollar is rising—and gold isn’t responding. The explanation lies in liquidity stress, collateral dynamics, and the plumbing of the global bullion system.

I. The Muted Signal

Long regarded as a safe haven, gold is expected to shine in times of crisis—particularly amid geopolitical shocks such as the escalating tensions surrounding the U.S.–Israel–Iran conflict.

Yet as instability deepens in the Middle East, a curious divergence has emerged. Oil prices have surged, and the U.S. dollar has strengthened, but gold has remained conspicuously subdued.

For many observers, this raises an uncomfortable question: has gold lost its safe-haven status?

The answer is almost certainly no. What we are witnessing instead is a familiar—but often misunderstood—dynamic in times of financial stress. Gold does not operate within a single, unified market responding to a single force. Rather, it exists at the intersection of multiple systems—monetary, financial, and physical—each reacting differently under pressure.

To understand gold’s apparent silence today, one must move beyond the simplistic safe-haven narrative and examine the underlying mechanics of how crises actually unfold.

II. Two Gold Markets

Gold is not a single market. It is two markets operating simultaneously.

The financial layer consists of futures traded on COMEX, forward contracts cleared through the London bullion system, and gold ETFs. Prices here move primarily in response to macro variables: the dollar, real interest rates, and shifts in global risk sentiment.

Figure 1

The resurgence in global gold ETF flows early in the year highlights the responsiveness of this financial layer to momentum, liquidity, and broader macroeconomic signals. (Figure 1, upper chart)

Unlike physical markets, positioning here can expand rapidly and at scale, without the need for underlying physical settlement, largely unconstrained by the frictions of moving and storing metal. Yet this flexibility stands in contrast to the more constrained and regionally fragmented nature of physical gold markets—a divergence that becomes evident when comparing pricing across Shanghai and London.

The physical layer operates very differently. It consists of doré bars produced by mines, bullion refined in Switzerland, jewelry demand across Asia, and steady accumulation by central banks. This layer depends on transportation networks, refinery throughput, vault logistics, and customs clearance.

Even at the level of demand, gold is not unified. As shown by the World Gold Council, demand is structurally divided across investment, jewelry, and industrial uses—each driven by distinct economic forces and time horizons. (Figure 1, lower graph)

Figure 2

Rather than moving in lockstep, Shanghai and LBMA pricing in early 2026 oscillated between premium and discount. This back-and-forth reflects a market where arbitrage is active but not seamless—revealing, in practice, the dual structure of gold as both a financial asset and a physical commodity. (Figure 2)

Under normal conditions, arbitrage keeps these two layers aligned. When physical premiums emerge in Asia or the Middle East, traders move gold to capture the spread, transmitting local signals back into global benchmarks. But when logistics slow or uncertainty rises, that alignment weakens. Physical markets may tighten even as financial benchmarks remain anchored to macro forces.

III. The Clearing Infrastructure

The global bullion system relies on a relatively concentrated infrastructure.

London dominates price discovery through the clearing system associated with the London bullion market, while Switzerland refines a large share of the world’s doré into internationally tradable bars. Logistics hubs in the Gulf, in turn, connect African supply with major consumer markets in Asia.

This network typically functions smoothly because gold flows continuously between these nodes.

Figure 3

In effect, the bullion system operates as a hub-and-spoke network: Switzerland serves as a dominant refining center processing a substantial share of global supply, while London anchors pricing and clearing. This concentration enhances efficiency, but also creates critical points of vulnerability.

When transport routes are disrupted or regional stability deteriorates, those vulnerabilities become visible.

Geopolitical tensions in the Middle East have begun to complicate these flows. Even partial restrictions on cargo routes or airspace can slow the movement of metal between mining regions, refineries, and end markets.

In a system where arbitrage depends on the physical movement of bullion, even modest friction does not simply delay flows—it weakens the transmission of price signals between markets.

IV. When Logistics Stress Becomes Financial Stress

Disruptions in the physical gold market rarely remain isolated.

When the movement of metal becomes uncertain, arbitrage trades that normally link markets turn riskier. Traders who once relied on seamless transfer between regions suddenly face basis risk, as the cost and timing of moving bullion becomes unpredictable.

Clearinghouses respond in the only way they can: by demanding additional collateral. Margin calls follow.

To meet these calls, participants often liquidate the most liquid assets available—typically dollar-denominated instruments.

What begins as a logistical friction in the physical market thus propagates into the financial system, triggering a collateral-driven tightening that can ripple across broader markets.

Disruptions in the physical market do not remain isolated.

V. The Collateral Squeeze

Gold occupies a unique position in global finance. It is simultaneously a commodity, a reserve asset, and a form of high-quality collateral used across derivatives, repo agreements, and bullion banking. During periods of market stress, this collateral role can temporarily dominate its safe-haven function.

Three mechanisms typically drive this dynamic:

Forced liquidation. Institutions facing margin calls sell the most liquid assets available. Gold is often among the first assets sold—not because confidence in it has vanished, but because it can quickly raise cash.
Haircut widening. When volatility rises, clearinghouses increase the discount applied to gold posted as collateral. Positions that were previously adequately margined can suddenly require additional coverage, forcing further liquidation
Tightening in the gold lending market. Bullion banks regularly lend gold through swaps and leases. Under stress, these channels can constrict as counterparties become more cautious.

A current illustration of these dynamics comes from Dubai. Recent reports show that shipments of gold have been delayed due to regional logistical bottlenecks, rising insurance premiums, and higher financing costs amid Middle East tensions.

Physical gold that is stuck or delayed can be sold locally—often at a discount—to meet liquidity needs even while global confidence in gold remains intact. This episode demonstrates how frictions in the physical market can amplify financial pressures, turning bullion into a source of immediate cash rather than a stable safe-haven.

These collateral-driven dynamics are not unprecedented. Similar patterns emerged during the global financial crisis, the European sovereign debt crisis, and the market dislocations of 2020. In each case, gold initially weakened during the liquidity phase of the shock before later reasserting its safe-haven role.

Financial instability theorist Hyman Minsky argued that crises often begin with a scramble for liquidity, forcing investors to sell even high-quality assets to meet obligations. Gold’s early weakness during crises—including today’s Dubai example—fits squarely within this pattern.

VI. The Dollar as Lightning Rod

A common explanation for gold’s weakness is that investors fled into U.S. Treasuries, strengthening the dollar.

Figure 4

The broader market picture suggests something different. Bond markets have not been rallying strongly. To the contrary, yields across many sovereign markets have risen as investors reassess inflation risk and fiscal sustainability following the oil shock. (Figure 4, upper image)

The dollar’s strength reflects another mechanism. The global financial system is largely funded in dollars. (Figure 4, lower diagram)

When volatility rises and leveraged positions unwind, institutions need dollars to meet margin calls and settle obligations.

Capital flows into the dollar not necessarily because it is safe, but because it is required. The dollar therefore acts less like a haven and more like a lightning rod for global liquidity stress.

Recent market behavior reinforces this dynamic. Episodes of rising dollar demand have coincided with sharp declines in gold prices and tightening cross-currency funding conditions—an indication that global markets are paying a premium to access dollars.

These moves suggest that what appears to be gold weakness is in fact a symptom of a broader liquidity squeeze, in which institutions sell liquid assets to obtain dollars needed to meet obligations.

Figure 5

Historical patterns support this interpretation. Gold has often declined during the initial phase of major financial stress events, including the global financial crisis and the pandemic shock, before rallying as liquidity conditions stabilize. (Figure 5)

Even gold can be temporarily liquidated in this environment, illustrating how financial liquidity dynamics can dominate its intrinsic safe-haven appeal.

VII. Fragmentation, Not Failure

Figure 6

Another structural trend may be shaping gold’s muted response.

Central banks continue to accumulate gold, extending a multi-year pattern of reserve diversification, although the pace of purchases has moderated in recent months. (Figure 6)

This suggests that while the strategic bid for gold remains intact, accumulation is becoming more measured—less urgent, more sensitive to price and liquidity conditions.

At the same time, new trading corridors have gradually developed outside the traditional Western clearing system. Asian markets frequently trade at premiums to London, while regional demand and policy dynamics increasingly influence the movement and pricing of physical gold.

Taken together, these developments point to a gradual shift toward a more multipolar bullion market. Disruptions to established logistics routes may accelerate this transition, encouraging alternative trading channels and settlement infrastructure.

This signal that the architecture of the gold market is evolving—away from a single, tightly integrated system toward a more fragmented landscape, where multiple hubs and pathways shape pricing, flows, and accumulation decisions.

While the trajectory of central bank gold policy remains uncertain under current conditions, a stronger dollar and rising fiscal demands—whether from defense spending or domestic support—may incentivize some central banks to mobilize gold reserves for liquidity.

Yet these same conditions—intensifying geopolitical fragmentation and rising monetary risk—may reinforce the opposite impulse: to accumulate gold as insurance, as a hedge against currency volatility, or as part of a broader strategy of reserve diversification away from the dollar.

This tension reflects a deeper uncertainty. Whether central banks become net sources of liquidity or continue as structural buyers will depend on how the current crisis evolves—whether it remains a liquidity event or transitions into a broader monetary regime shift.

VIII. What the Quiet Is Actually Saying

Gold’s muted reaction to current geopolitical tensions is not a failure of its safe-haven role. It is a signal—just not the one most investors are looking for.

What we are observing is the early phase of a crisis in which liquidity demand, dollar funding pressures, and market microstructure dominate price formation. In this phase, assets are not repriced based on long-term risk, but on immediate funding needs.

History suggests that these phases do not persist indefinitely. Energy shocks, financial stress, and monetary instability tend to unfold sequentially, not simultaneously.

If current tensions deepen into broader economic and financial disruption, the forces suppressing gold today may reverse. The same mechanisms driving liquidity demand—margin calls, collateral tightening, and dollar scarcity—often give way to monetary easing and balance sheet expansion.

It is typically at that point—not during the initial scramble for liquidity—that gold reasserts its role.

The signal is not absent. It is delayed.

Gold is not failing as a safe haven—it is being temporarily subordinated to the needs of a dollar-based financial system under stress

VIIIA. Post Script: "There is No Haven"

Recent market behavior reinforces this interpretation. In the past week, the dollar, gold, U.S. Treasuries, bitcoin, and oil have all weakened simultaneously.

In normal circumstances, at least one of these assets would function as a refuge. When all of them decline together, the signal is different: markets are not seeking safety—they are seeking liquidity.

In other words, the system is still in the scramble-for-cash phase of adjustment or at times like this, markets behave as if no haven exists at all.

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

noreply@blogger.com (Unknown) — Sun, 15 Mar 2026 10:13:00 +0000

People always look for political solutions to economic problems. Economic solutions are individually based; they amount to producing more and consuming less. Political solutions are collectively based; they amount to some people deciding how much wealth to take from some other people. The question is, how do political solutions manifest themselves?—Doug Casey

In this issue

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

I. War, Oil, and Markets: The Shock Transmission Spreads

II. Stagflation Ahoy! Employment Weakens as Inflation Surges

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface

IIIA. Bank Liquidity Buffers Are Thinning
IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling

IIIB.1 Liquidity Detaches From Credit

IIIB.2 External Liquidity Replaces Domestic Credit

IIIB.3 Fiscal Absorption in Bank Balance Sheets

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission

IIID. A Financial System Becoming Balance-Sheet Driven

IV. The Yield Curve’s Hidden Message

V. Oil Shock as the Catalyst for a Banking System Test

VI. The Policy Dilemma Ahead

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility

Oil Shock Meets Systemic Fragility: How War, Inflation, and Liquidity Strains Are Converging on Philippine Banks

The oil shock from the Middle East war exposes underlying financial strains in the Philippine economy, evident in the weakening peso, tightening bank balance sheets, and a shifting yield curve.

I. War, Oil, and Markets: The Shock Transmission Spreads

Figure 1

Since the latest outbreak of the Middle East conflict involving US, Israel on Iran, global oil markets have repriced sharply. The US WTI and Brent Oil benchmarks have traded slightly below and above the $100/barrel. (Figure 1, topmost chart)

For an import-dependent economy like the Philippines, the transmission mechanism was immediate.

Three domestic market reactions stand out. The ‘oil shock’ aggravates the structural pressure from persistent external deficits from the deepening savings-investment gap imbalances

First, the peso plunged to a record low against the dollar, with the USD/PHP exchange rate surging to 59.735, the highest level on record. (Figure 1 middle graph)

The move reinforced the breach of the Bangko Sentral ng Pilipinas’ (BSP) 59-level “Maginot Line,” a ceiling the central bank had defended from 2022 through late 2025.

The March 13 breakout was accompanied by interbank trading volume jumping 16% to roughly $2.23 billion, marking the fifth-largest turnover since 2025 amid the pair’s sharp upward spiral this March.

Notably, earlier breakouts were rarely accompanied by comparable surges in trading volume, likely reflecting BSP interventions in the market. (Figure 1, lowest image)

In contrast, the current episode appears to signal strong underlying demand for the US dollar, suggesting that momentum could soon put the 60 level to an immediate test.

The oil shock further aggravates these pressures, compounding the peso’s weakness alongside persistent external deficits stemming from a widening savings–investment gap.

Second, domestic equities began to unravel.

The PSEi erased most of its early-year gains (+0.1% YTD as of March 13), as the prospect of higher energy costs—on top of rising inflation, weaker GDP growth, currency volatility, tighter financial conditions, and continued foreign selling—dampened sentiment and offset earlier orchestrated pumps of the index.

Figure 2

Third, the domestic bond market began adjusting to mounting inflation risks. Philippine government securities sold off across the curve, while the yield curve reshaped itself through a bearish flattening—a configuration that typically signals rising financial stress rather than healthy growth expectations. (Figure 2, top and middle visuals)

In short, markets quickly priced the oil shock not as a temporary disturbance, but as a binding macroeconomic constraint.

II. Stagflation Ahoy! Employment Weakens as Inflation Surges

The ‘oil shock’ arrives precisely as the domestic economy is already emitting stagflationary signals.

Inflation accelerated again in February. Philippine CPI rose to 2.4%, marking the fourth consecutive monthly increase and a 13-month high.

Figure 3

More alarming was the surge in food inflation for vulnerable households. Food CPI for the bottom 30% income group spiked from 0.6% in January to 2.2% in February, suggesting rising hunger and worsening self-rated poverty among a substantial share of families—despite the rollout of Php 20 rice programs and government-mandated maximum suggested retail prices (MSRPs). (Figure 3, topmost window)

Crucially, these developments occurred before the oil shock. Yet the first wave of its impact is already visible:

staggered ‘jumbo’ fuel price increases
ferry operators beginning to raise fares
gasoline stations reportedly hiking prices ahead of authorized adjustments
the Department of Trade and Industry (DTI) warning against hoarding and profiteering
Meralco announcing another power rate hike on top of January’s GEA-related increase
Water Utilities, Maynilad and Manila Water to raise rates in the second quarter

A further inflation risk lies in agricultural inputs. The Philippines remains heavily dependent on imported urea fertilizer, much of it sourced from the Gulf region. (Figure 3, middle diagram)

Any disruption to supply chains or price spikes linked to Middle East tensions could raise production costs for domestic agriculture, creating second-round pressures on food prices in the months ahead.

And more drastic adjustments are likely to follow. The snowballing effects and feedback loops from higher energy costs could feed into what may become the third wave of Philippine CPI cycle.

Figure 4

At the same time, as the GDP wobbles, labor market conditions are deteriorating. Unemployment rose to 2.96 million in January 2026—a pandemic era high, while underemployment also increased. Employment rate fell to 94.2%, lowest since June 2022 (Figure 4, topmost image)

More concerning are the sectoral shifts beneath the headline numbers:

agricultural employment contracted (Figure 4, middle chart)
trade employment declined sharply
labor force participation fell, suggesting that official unemployment figures may understate actual labor slack (Figure 4, lowest image)
displaced workers increasingly moved into lower-productivity informal sectors

Rising fertilizer costs also threaten agricultural employment and output, compounding the deterioration already visible in rural labor markets.

These shifts are critical because they indicate weakening household income capacity precisely as prices for essential goods—fuel, electricity, and water—are rising.

Moreover, with conflict in the Middle East ongoing, more overseas Filipino workers (OFWs) are being repatriated. This is not merely a humanitarian issue—it also carries macroeconomic consequences.

As repatriations increase, returning workers expand the domestic labor pool, potentially pushing unemployment or underemployment higher.

At the same time, fewer workers abroad could mean weaker remittance inflows, widening the Philippines’ balance-of-payments (BoP) deficit—a consequence of its savings-investment gap—and intensifying pressure on the peso.

Remittances are a key pillar of household consumption and savings formation, so disruptions could dampen domestic demand.

This combination—rising costs colliding with weakening income growth—is the textbook definition of stagflationary pressure.

For a banking system heavily exposed to consumer lending, mortgages, and corporate leverage, such an environment gradually erodes balance-sheet quality.

III. The Financial Plumbing: Liquidity Is Tightening Beneath the Surface

The real story, however, lies beneath the macro headlines—in the financial plumbing of the banking system.

Recent balance-sheet data from the Bangko Sentral ng Pilipinas reveal a system quietly tightening.

IIIA. Bank Liquidity Buffers Are Thinning

Key indicators already show signs of intensifying pressure.

Figure 5

Both cash-to-deposit and liquid-assets-to-deposit ratios have been trending downward, indicating that banks are operating with thinner liquidity buffers relative to their funding base. (Figure 5, topmost pane)

At the same time, although the non-performing loan (NPL) ratio ticked higher in January from its May 2025 lows, the percentage metric masks a deeper Wile E. Coyote velocity dynamic.

While the NPL ratio appears relatively contained, gross NPLs measured in pesos have actually climbed to fresh record highs in January. The expansion of bank credit—through the denominator effect—suppresses the ratio even as the absolute level of distressed loans continues to rise. (Figure 5, middle graph)

To recall, aside from this denominator effect, the suppression of the NPL ratio can also arise from a combination of factors:

loan restructurings
charge-offs
regulatory relief measures
reclassification effects
inaccurate reporting

Viewed from the peso lens, NPLs reveal mounting distress within the system. Viewed from the ratio perspective, the deterioration appears modest. Yet the direction of travel remains critical. Historically, NPL ratios lag economic stress rather than lead it.

If GDP weakens further while employment softens and energy prices help erode the purchasing power of the peso, this deterioration could accelerate.

The dynamic resembles what Hyman Minsky described as the transition from hedge finance toward speculative finance. During periods of easy liquidity, borrowers accumulate obligations under the assumption that refinancing will remain available. But when shocks—such as an oil spike, fiscal strain, or currency depreciation—raise costs while eroding incomes, balance sheets that once appeared stable can quickly become fragile.

IIIB. The Depository Corporations Survey: Credit Transmission Is Stalling

The Bangko Sentral ng Pilipinas Depository Corporations Survey (DCS) provides a system-wide view of balance sheets across the banking sector. Recent data suggest that the traditional transmission mechanism between liquidity and credit creation is beginning to weaken.

IIIB.1 Liquidity Detaches From Credit

Historically, money supply growth in the Philippines has closely tracked bank lending. In a bank-dominated financial system, loans create deposits, and deposit expansion feeds directly into the growth of broad money.

Recent data, however, show that this relationship has broken down.

Universal and commercial bank loan growth has been rolling over since mid-2025 even as broad money (M3) continues to expand. The divergence suggests that liquidity creation is increasingly being driven by balance-sheet channels other than private credit expansion. (Figure 5, lowest visual)

In other words, liquidity is still growing—but the mechanism generating that liquidity is shifting.

IIIB.2 External Liquidity Replaces Domestic Credit

The shift becomes clearer when examining the external side of the banking system’s balance sheet.

Figure 6

Even as domestic lending slows (claims on Private sector), net foreign assets within the financial system have expanded. Higher gold prices, reserve valuation effects, and external borrowing have all contributed to rising foreign asset positions. Net foreign assets were up 5.9% and 10.2% in the first two months of 2026, while claims on the private sector posted hefty gains of 10.7% and 10.6% respectively. (Figure 6, topmost window)

These external balance-sheet gains inject liquidity into the domestic financial system despite slowing private credit growth.

The implication is that a growing share of monetary expansion is being supported by external balance-sheet dynamics rather than internal credit creation.

IIIB.3 Fiscal Absorption in Bank Balance Sheets

Another structural shift appears in the composition of bank assets.

As lending to the private sector slows, banks’ claims on the national government (NCoCG) continue to expand. This suggests that sovereign borrowing is increasingly absorbing liquidity within the financial system. (Figure 6 middle chart)

When government borrowing begins to dominate balance-sheet expansion, it crucially reflects a crowding-out mechanism, in which the state becomes the primary absorber of financial resources while private credit growth weakens.

This dynamic creates a paradoxical condition: liquidity remains abundant within the monetary system, yet the flow of credit into productive economic activity begins to substantially slow.

From the perspective of Austrian capital theory, this shift reflects the kind of structural distortion that prolonged liquidity accommodation can generate. As the late Austrian economist Roger W. Garrison argued, credit expansions can redirect financial resources toward sectors or activities that appear viable only under persistently easy financial conditions. When lending momentum slows or funding conditions tighten, the underlying structure of investment begins to reveal its fragilities.

IIIC. The Monetary Authority Survey (MAS): Liquidity Without Transmission

If the Depository Corporations Survey reveals the evolving structure of bank balance sheets, the Monetary Authority Survey (MAS) shows how the central bank’s own balance sheet is shaping liquidity conditions.

Recent MAS data point to a subtle but important change in the character of monetary expansion.

One revealing indicator is the divergence between currency in circulation and broad money growth.

Currency issuance has slowed even as M3 continues to expand. Normally, expanding deposits eventually translate into greater currency usage as money circulates through the broader economy.

When currency growth decelerates while deposits continue rising, it suggests that liquidity is remaining within the bank dominated financial system rather than circulating through real economic activity.

This pattern suggests a financial environment in which monetary liquidity expands while bank balance-sheet liquidity tightens.

Sovereign borrowing increasingly absorbs bank asset capacity while external balance-sheet dynamics inflate monetary aggregates.

The result is a divergence: liquidity appears abundant in the monetary statistics even as credit transmission to the private economy weakens.

IIID. A Financial System Becoming Balance-Sheet Driven

Taken together, the signals from the DCS and MAS point to a financial system undergoing a structural transition.

Bank lending growth is slowing. Domestic credit expansion is weakening. Currency circulation is decelerating.

Yet monetary liquidity continues to expand—supported by external asset accumulation, sovereign borrowing, and balance-sheet adjustments within the financial system.

In other words, system liquidity is still growing, but it is increasingly detached from private credit creation and real economic activity.

Importantly, these shifts were already visible in the data before the oil shock emerged. The system entered the current energy shock with underlying financial imbalances already developing beneath the surface.

The oil shock therefore did not create the stress now appearing across markets. It merely accelerated and exposed the structural strains that had already begun to form within the country’s financial architecture.

IV. The Yield Curve’s Hidden Message

Finally, the government bond market is beginning to reflect these tensions.

Figure 7

Since the outbreak of the Middle East conflict, the Philippine yield curve has shifted toward a bearish flattening, led by a selloff in the belly of the curve—particularly the 5- to 10-year segment. (Figure 7, upper chart)

Even the front end, which typically reflects expectations about future monetary policy, has begun to rise. (Figure 7, lower graph)

The increase in short-term Treasury bill yields suggests that markets are beginning to reassess expectations for monetary easing, reflecting growing concern that inflationary pressures and fiscal risks may constrain policy flexibility.

Yet, such movements in the yield curve often emerge when markets begin pricing a combination of risks:

inflation pressures
weakening economic growth
rising fiscal borrowing needs
duration risk

Recent policy responses reinforce these concerns. Authorities have begun rolling out subsidies for tricycle and jeepney drivers, and the fisherfolks, including a proposed Php 3.5-billion program to subsidize commuters and partially finance the fuel costs of public utility vehicles (PUVs).

In the world of “free-lunch politics,” such subsidies risk widening fiscal deficits. The Treasury curve increasingly appears to be pricing the possibility that oil-shock relief measures could translate into larger borrowing requirements and once again inflationary pressures.

In other words, the curve is not signaling healthy economic expansion.

Instead, it points toward tightening financial conditions and rising interest-rate pressures. Most importantly, it reflects financial stress emerging under inflation constraints.

For banks, this shift in the yield curve is not merely a market signal. It directly affects funding costs, asset valuations, and the profitability of maturity transformation—the core business model of the banking system.

V. Oil Shock as the Catalyst for a Banking System Test

Taken individually, each of these developments might appear manageable.

Taken together, however, they form a reinforcing loop.

Higher oil prices worsen the trade deficit and weaken the peso—an outcome that organically reflects the widening savings-investment gap in the domestic economy.

A weaker peso raises the cost of imports and intensifies inflationary pressures.

Rising prices compress real household incomes, while employment weakens as economic growth slows.

The deterioration of household balance sheets eventually translates into rising loan stress within the banking system.

As risks increase, banks respond by tightening lending standards and slowing credit growth. The resulting credit contraction then further dampens economic activity, reinforcing the cycle.

This is the mechanism through which macroeconomic shocks propagate through financial systems.

VI. The Policy Dilemma Ahead

The challenge for policymakers is that the traditional policy response may no longer be readily available.

If inflation remains elevated due to oil prices and currency pressures, the central bank cannot easily deploy aggressive monetary easing.

Yet if economic growth slows and credit conditions tighten, the usual policy reflex is to rely on easy-money support from the banking system.

If recession risks become imminent, the increasingly crowded fiscal space not only limits the scope for government intervention but may itself amplify financial fragility.

This is the classic emerging-market policy trap: inflation constrains monetary easing just as financial fragility begins to demand it.

The dilemma is not purely economic but also institutional. Public choice economists such as James M. Buchanan emphasized that policymakers face incentives to favor short-term stabilization over long-term adjustment.

Over time, as Mancur Olson observed, institutional arrangements tend to accumulate rigidities that make meaningful reform increasingly difficult.

VII. Conclusion: The Oil Shock Exposes Pre-Existing Fragility

The current oil shock is not creating the Philippines’ financial vulnerabilities. It is revealing them.

Years of debt expansion, fiscal deficits, and reliance on liquidity support have already stretched balance sheets across households, corporations, banks, and even the government itself.

The war-driven surge in oil prices simply adds another layer of stress to an already fragile system.

If energy prices remain elevated and the peso continues weakening, the Philippine banking sector may soon face a test not seen since the pandemic period—this time under far less accommodating global financial conditions.

The coming months will determine whether the financial system can absorb the shock.

Or whether the oil spike ultimately becomes the catalyst that exposes deeper structural strains within the country’s financial architecture.

Caveat Emptor.

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility

noreply@blogger.com (Unknown) — Sun, 08 Mar 2026 07:02:00 +0000

“War,” Mises observed, “is harmful, not only to the conquered but to the conqueror. Society has arisen out of the works of peace; the essence of society is peacemaking. Peace and not war is the father of all things. Only economic action has created the wealth around us; labor, not the profession of arms, brings happiness. Peace builds; war destroys.”—Llewellyn H. Rockwell Jr

In this issue

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility

I. Geopolitical Shock: Philippine Markets React

II. February Yield Curve: Fragility Already Forming

III. What the Yield Curve Reflects: The Consumption of Savings

IV. The Defective Anchor: Savings Is a Residual of GDP

V. The Php3.9 Trillion Gap: Structural, Not Cyclical

VI. Inflation and the Erosion of Real Savings

VII. Fiscal Absorption, and Budget Excess

VIII. Record Public Debt Magnifies the Crowding Out

IX. Micro Signals: Consumption Recalibration (Marks and Spencer, SM Foot Traffic)

X. BSP Increases Cash Withdrawal Limits and Financial Stability

XI. External Shock Transmission: When Geopolitics Meets Structural Fragility

A. Energy and Food Inflation

B. Industrial Supply Chain Disruptions

C. OFWs, Tourism and Service Sector Exposure

D. Financial Transmission and Emerging Market Stress

XII. Strategic Vulnerability: Drift to a War Economy, Thucydides Trap Geopolitics

XIII. Systemic Shock Scenario

XIV. Conclusion: The Real Constraint: Savings Scarcity in a Volatile World

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility

Rising oil prices, supply chain risks, and widening external imbalances are revealing deeper structural weaknesses in savings, fiscal dynamics, and financial markets.

The Php3.9 Trillion Savings-Investment Gap: How the Middle East Conflict Exposed the Philippines’ Economic Fragility

I. Geopolitical Shock: Philippine Markets React

Last week we wrote:

For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks.

The escalation of the U.S.–Israel–Iran conflict triggered a sharp repricing across Philippine financial markets.

Figure 1

The USD–Philippine peso reclaimed the 59 level, the BSP’s Maginot Line.
Despite rescue pumps centered on International Container Terminal Services Inc. (ICTSI), the primary equity benchmark, the PSEi 30, fell by 4.4%. (Figure 1, topmost pane)
Worse, yields of the Philippine Treasury curve rose across maturities, drastically shifting direction from bullish to bearish steepening, reflecting a broad rise in rates. (Figure 1 , middle image)

However, the adjustment was not uniform across maturities.

Yields in the belly of the curve — particularly in the five-to-ten-year segment — rose the most, suggesting that investors were reassessing medium-term inflation and fiscal risks rather than short-term policy expectations. Such a pattern is consistent with a rise in the term premium, where investors demand additional compensation for holding duration amid heightened uncertainty.

Relative pricing reinforces this interpretation.

Philippine ten-year yields have recently risen faster than their U.S. Treasury counterparts, widening the spread between the two benchmarks. If the move were purely a global risk-off adjustment, local yields would likely mirror U.S. Treasuries. (Figure 1, lowest graph)

Instead, the divergence suggests that global shocks are interacting with domestic vulnerabilities already embedded in the curve — including rising sovereign absorption of liquidity and persistent fiscal supply.

In that sense, the geopolitical shock did not create the steepening dynamic; it exposed and accelerated pressures that were already forming within the Philippine yield structure.

The Middle East conflict may therefore reveal something deeper about the Philippine economic development model — particularly the country’s persistent savings-investment gap.

II. February Yield Curve: Fragility Already Forming

Prior to the outbreak of the Middle East conflict, the Philippine yield curve in February already exhibited subtle signs of structural tension.

Figure 2

The curve experienced bullish steepening: short-dated yields fell sharply as markets priced policy relief, while the belly of the curve declined more modestly. Yet the longest maturities — particularly the 20- to 25-year segment — failed to rally alongside the front end. (Figure 2, topmost window)

This divergence reflected optimism over near-term liquidity conditions but lingering skepticism over long-horizon risks.

Investors appeared willing to price policy accommodation in the short run, while still demanding continued compensation for holding ultra-long duration amid persistent fiscal issuance and the possibility that easing could eventually translate into renewed inflation pressure.

In short, the curve suggested that markets were optimistic about near-term liquidity but cautious about long-term stability.

That skepticism would later prove meaningful once geopolitical risks intensified.

III. What the Yield Curve Reflects: The Consumption of Savings

The yield curve’s structure is ultimately a reflection of accumulating imbalances arising from the persistent consumption of savings.

When investment chronically exceeds domestic savings, the difference must be financed through borrowing, foreign capital inflows, or monetary accommodation (financial repression/inflation tax).

As this imbalance widens, the bond market begins to reflect the underlying funding pressure through changes in yield levels and curve structure.

In such an environment, the yield curve becomes more than a signal of growth expectations. It becomes a barometer of the economy’s capacity to finance its own investment demand.

The Philippine curve’s evolving shape therefore hints at a deeper structural issue: the scarcity of domestic savings relative to the scale of investment being pursued.

IV. The Defective Anchor: Savings Is a Residual of GDP

The Philippines reported a record savings-investment gap in 2025. Gross domestic savings reached Php2.35 trillion, equivalent to 8.4% of GDP, while investment reached Php 6.25 trillion, or 22.3% of GDP, resulting in a Php 3.9 trillion gap, about 5.4% higher than in 2024. (Figure 2, lower chart)

However, the savings figure itself is derived from the GDP framework.

Gross domestic savings is not directly observed thrift. Instead, it is calculated as:

GDP – Final Consumption Expenditure

This means the savings figure is fundamentally an accounting residual, not a direct measurement of household or corporate saving behavior.

Several implications follow:

If GDP is overstated, savings is automatically overstated.
If government spending inflates GDP, savings mechanically rises — even if households are financially strained.
If inflation boosts nominal GDP, “savings” increases on paper without improving real financial capacity.
A GDP powered by debt expansion does not necessarily entail rising savings, but rather extended leveraging.

An 8.4% savings rate does not necessarily mean households saved more. It means the national income accounting identity indicates that they did.

Figure 3

In a deficit-driven economy where public spending is elevated, GDP itself can be propped up by the very borrowing used to finance the savings-investment gap. This makes the savings measure partially endogenous to debt expansion.

In 2025, the increase in nominal borrowing exceeded growth of nominal and real GDP! (Figure 3, topmost visual)

In effect, the economy is using a debt-inflated denominator to measure the shortage of savings required to fund debt-driven investment.

That circularity matters.

V. The Php3.9 Trillion Gap: Structural, Not Cyclical

The magnitude of the imbalance becomes clearer when the savings-investment gap is examined directly.

In 2025:

Savings: Php2.35 trillion
Investment: Php6.25 trillion
Gap: –Php3.90 trillion

This represents the largest gap in recent years and marks a continuation of a widening trend since 2022.

Such an imbalance is not merely a statistical curiosity. It represents the scale of financing required from outside the domestic savings pool to sustain the country’s investment program.

When investment persistently exceeds domestic savings, the difference must be financed through:

external capital inflows
increased public or private borrowing
monetary accommodation
or some combination of all three.

There is no automatic equilibrium mechanism that closes such a gap organically. The imbalance can narrow only through:

higher real savings, lower investment,
or a cyclical downturn that compresses demand.

Yet the Philippine economy is attempting to sustain an investment rate exceeding 22 percent of GDP while maintaining a single-digit domestic savings rate.

Maintaining this configuration requires continuous financial intermediation and leverage expansion.

In effect, investment persists even when the domestic financial base capable of supporting it remains limited.

VI. Inflation and the Erosion of Real Savings

Inflation dynamics further complicate the savings constraint.

Even moderate price increases reduce the real purchasing power of the savings that households and firms are able to accumulate. When inflation is concentrated in essential expenditures—such as food, energy, and housing—the erosion of savings becomes particularly pronounced among lower- and middle-income households.

While headline inflation may remain within official target ranges, its composition and distribution matters. Food inflation and other essential expenditures absorb a large share of household income, limiting the ability of households to build financial buffers.

For instance, February data show that the Food CPI for the bottom 30% jumped from 0.6% to 2.2%, signaling rising pressure on the consumption basket of poorer households and foreshadowing renewed stress in hunger and self-rated poverty indicators. (Figure 3, middle diagram)

Which raises a simple question: whatever happened to the nationwide Php20 rice rollout and the MSRP regime? Or has the law of diminishing returns quietly reasserted itself? (Figure 3, lowest chart)

These pressures are emerging even before any potential spillovers from the evolving Middle East conflict.

This means that even if nominal savings appear stable within national accounts, the real savings available to finance domestic investment may be shrinking.

In such an environment, the effective savings-investment gap becomes wider than what the nominal accounting framework suggests.

Figure 4

In any case, the Bangko Sentral ng Pilipinas’ easing cycle has contributed to the recent acceleration in CPI, reinforcing the broader inflationary cycle. If current liquidity trends persist, these dynamics may generate a third wave of inflation cycle (as we continually forecast), which would continue to erode the real value of household savings. (Figure 4, topmost diagram)

VII. Fiscal Absorption, and Budget Excess

Fiscal dynamics have increasingly played a central role in bridging the savings-investment imbalance.

Large public investment programs and persistent fiscal deficits require sustained government borrowing. As sovereign issuance expands, the state absorbs a growing share of the available liquidity within the domestic financial system.

Another dimension of fiscal dynamics involves the difference between released budget allocations and actual spending disbursements.

When government agencies receive funding releases ahead of actual project implementation, liquidity enters the financial system before real economic activity materializes. This can temporarily ease financial conditions even as underlying fiscal supply continues to accumulate.

The result is a financial environment where liquidity conditions may appear accommodative in the short run while structural funding pressures continue to build beneath the surface.

Actual 2025 spending hit Php6.49T, exceeding the Php 6.33T enacted GAA—the second-largest overrun since 2021 and the seventh straight year of excess. (Figure 4, middle graph)

Persistent post-enactment augmentation weakens Congress’s budget authority and shifts fiscal discretion to the executive.

Meanwhile, the Bureau of the Treasury reported a Php1.577 trillion fiscal deficit in 2025—third widest in history, as government expenditures reached a record Php6.03 trillion while revenues totaled Php4.453 trillion. (Figure 4, lowest chart)

The Php 6.49 trillion represents total allotments released—spending authority exercised during the year—while the Php6.03 trillion reflects actual cash disbursements recorded by Treasury. Allotments and cash outflows do not perfectly align due to timing lags, multi-year obligations, and accounting adjustments. Both figures are valid, but they measure different stages of fiscal execution.

VIII. Record Public Debt Magnifies the Crowding Out

Public debt dynamics reinforce this absorption effect.

Figure 5

As fiscal deficits accumulate, the government must continuously refinance maturing obligations while issuing additional securities to fund new borrowing requirements. This process steadily expands the sovereign’s claim on domestic and external savings pools. (Figure 5, topmost window)

Recent data from the Bureau of the Treasury show that national government debt continued to climb in January 2026 to reach a record Php 18.134 trillion, reflecting the cumulative impact of sustained fiscal deficits, elevated interest costs, and ongoing borrowing to finance development programs. The rate of debt growth has steadily been rising since 2023. (Figure 5, middle image)

While debt expansion can support public investment in the near term, it simultaneously increases the financial system’s exposure to sovereign credit and interest-rate risk.

Rising debt levels therefore deepen the interaction between fiscal policy and domestic liquidity conditions. As government securities issuance expands, banks, pension funds, and institutional investors allocate a larger share of their portfolios to sovereign instruments, potentially crowding out private sector credit over time

The Bank’s net claims on the central government spiked to a record Php 6.135 trillion in December 2025—equivalent to about 35% of outstanding government debt now effectively monetized by the banking system. (Figure 5, lowest chart)

Nonetheless, treasury markets often register these pressures first, particularly through changes in the term structure of interest rates.

IX. Micro Signals: Consumption Recalibration (Marks and Spencer, SM Foot Traffic)

Macroeconomic imbalances often surface first in microeconomic behavior.

Recent developments in Philippine retail illustrate subtle shifts in consumption patterns.

The recalibration of operations by international retailers such as Marks & Spencer (M&S) suggests increasing sensitivity of discretionary spending to economic conditions.

Premium and mid-tier consumption categories are typically among the earliest segments to reflect shifts in household purchasing power. When real income growth slows or financial buffers weaken, consumers tend to prioritize essential spending while reducing discretionary purchases.

The cautionary signal from M&S is reinforced by declining mall activity reported by SM Prime Holdings, with foot traffic in SM Supermalls reportedly falling by roughly 26 percent (from a record 1.9 billion visitors in 2024 to 1.4 billion in 2025. This coincides with a moderation in per-capita GDP growth, which slowed to 2.9 percent in the fourth quarter and 3.7 percent for 2025.

Supermarket operators have likewise reported weaker-than-expected demand, alongside signs of customer migration toward lower-priced distributors and wholesalers. These developments have also been attributed partly to the impact of recent minimum-wage adjustments, which may be affecting both consumer purchasing patterns and retail cost structures.

Figure 6

At the same time, the recent softness in per-capita household income growth has been accompanied by plateauing credit expansion among universal banks and a gradual easing in employment growth. (Figure 6, upper and lower graphs)

Taken together, these indicators point to deepening signs of demand-side fatigue and raise the possibility of emerging stagflationary pressures.

The pattern suggests sustained compression in consumption velocity and discretionary elasticity—conditions under which portfolio recalibration, such as M&S’s operational adjustments, becomes economically rational.

Such responses are consistent with an economic environment where investment remains elevated while fiscal expansion absorbs a significant share of domestic resources (crowding out effect). In this context, increasingly leveraged balance sheets may constrain income generation and limit the capacity for household savings formation.

In this sense, retail recalibration may represent a microeconomic reflection of the broader macroeconomic imbalance.

X. BSP Increases Cash Withdrawal Limits and Financial Stability

As the savings–investment imbalance widens, maintaining financial stability increasingly depends on liquidity management. The Bangko Sentral ng Pilipinas’ increase of the AML cash-withdrawal trigger from Php500,000 to Php1 million illustrates how regulatory measures—aimed at curbing corruption—interact with liquidity conditions in a system where domestic savings alone cannot fully support investment.

When access to deposits is subject to thresholds or enhanced monitoring, behavior adjusts. Firms stagger transactions, households hoard cash, and informal channels gain marginal attractiveness. The earlier Php 500,000 threshold already intersected routine commercial flows, so even small frictions can influence normal business activity. Raising the trigger reflects calibration, signaling awareness that liquidity behavior matters for stability.

External shocks further expose structural constraints. Rising energy prices or currency pressures reveal the fragility of a growth model reliant on debt-financed investment amid limited domestic savings. In this environment, regulatory calibration becomes a recurring feature of financial governance, shaping behavior at the margins and influencing the circulation of money in the economy.

Legal definitions may distinguish between “capital controls” and “AML thresholds,” but economic agents respond to function, not classification. If large withdrawals attract friction, delay, or reputational risk, behavior adjusts. Firms stagger transactions. Households pre‑emptively hoard cash. Informal channels gain marginal attractiveness. Velocity softens at the edges. Such policy creates forced trade‑offs in the use of private property.

Freedom conditioned by compliance is still freedom altered. In functional terms, the BSP withdrawal cap operates as a form of capital control—an indirect restraint on liquidity mobility, justified under the banner of anti‑money laundering.

The label may differ, but the effect is the same: liquidity is managed not only by market forces but by regulatory thresholds that redefine how money circulates.

XI. External Shock Transmission: When Geopolitics Meets Structural Fragility

The Middle East conflict introduces several transmission channels that could amplify the Philippines’ already fragile savings-investment balance.

Note: In an increasingly complex and interconnected world, the factors outlined above represent only the “seen” or visible channels and their immediate second-order effects. Should the current disorder persist, the transmission mechanisms could extend far beyond this list, propagating through indirect and more diffuse channels that would require a far more exhaustive examination. Even so, the initial escalation of the Middle East conflict is already significant enough to expose underlying imbalances—both domestically and across the global economy.

A. Energy and Food Inflation

The Philippines remains heavily dependent on imported energy. A sustained rise in oil prices resulting from instability in the Middle East could increase transportation and production costs across the economy.

Higher energy prices often translate into food inflation, as logistics, fertilizer costs, and agricultural inputs become more expensive. Because food accounts for a significant share of household expenditure (34.78% in BSP/PSA CPI basket), rising prices reduce the ability of households to accumulate savings.

In an economy already characterized by limited domestic savings, such inflationary pressures further weaken the financial base—via weakened savings structure—needed to support investment.

B. Industrial Supply Chain Disruptions

A broader regional conflict could also disrupt global supply chains.

Industrial inputs, shipping routes, and energy supply lines connecting Asia, Europe, and the Middle East could face delays or increased insurance costs. These disruptions would raise production costs and freight rates, placing additional pressure on import-dependent economies like the Philippines.

Higher freight costs translate directly into higher import prices, reinforcing inflationary pressures and worsening the country’s trade balance.

C. OFWs, Tourism and Service Sector Exposure

Geopolitical instability can affect the Philippines through multiple channels, including overseas Filipino workers (OFWs), travel flows, and tourism confidence.

Figure 7

The country’s reliance on remittances, particularly from the Middle East, creates potential vulnerability: any disruption to regional labor markets could reduce household income and weaken domestic consumption.

OFW personal and cash remittances grew 3.3% in 2025, marginally above 3% in 2024, but both continue a gradual slowdown in growth since 2010, consistent with diminishing returns. Nevertheless, nominal inflows reached record levels of $39.6 billion (personal) and $35.6 billion (cash). (Figure 7, topmost pane)

Even though the Philippines is not near the conflict zone, global travel demand often declines during periods of geopolitical uncertainty.

A slowdown in tourism receipts would reduce foreign exchange inflows and weaken service-sector revenues.

Combined with rising energy import costs, lower remittances and tourism earnings could widen the current account deficit, exposing the economy to external shocks.

After a significant statistical revision, foreign tourist arrivals shifted from contraction to growth. Foreign arrivals rose 9.2% in 2025, up from 8.7% in 2024, while total arrivals including overseas Filipinos increased 9%, slightly below the 9.2% growth recorded in 2024. Gross arrivals reached 5.9 million, exceeding 2016 levels. (Figure 7, middle graph)

The Philippines is considered particularly vulnerable to oil price shocks due to its deficit channel, highlighting how geopolitical events can amplify existing structural imbalances in income, savings, and external liquidity.

Philippine Balance of Payments BoP deficits have accumulated since 2014, broadly coinciding with the increasing share of government spending in GDP. The pandemic recession amplified this trend. In 2025, the BoP recorded a $5.6 billion deficit, the second-largest shortfall since 2022. (Figure 7, lowest chart)

D. Financial Transmission and Emerging Market Stress

Financial markets represent another channel through which geopolitical shocks propagate.

Periods of global uncertainty often push investors toward safe-haven assets such as U.S. Treasuries, US dollar and gold. For emerging markets with structural savings deficits, this shift can lead to tighter financial conditions.

Rising global yields and capital outflows can trigger margin calls, balance sheet adjustments, and risk repricing across emerging market debt markets.

Countries relying heavily on external financing to sustain investment programs may therefore face increasing borrowing costs or reduced access to capital.

XII. Strategic Vulnerability: Drift to a War Economy, Thucydides Trap Geopolitics

The Philippines’ strategic alignment with the United States also introduces geopolitical considerations.

The presence of nine U.S. military facilities across several Philippine locations under the Enhanced Defense Cooperation Agreement places the country within the broader regional security architecture of the United States.

In the event that a regional conflict expands beyond the Middle East into a broader geopolitical confrontation, these installations could increase the Philippines’ exposure to geopolitical risk and economic disruption.

Since the outbreak of the U.S.–Israel–Iran war, U.S. bases in the Middle East have repeatedly become targets of attacks or retaliatory strikes—underscoring how overseas installations can act as magnets for escalation during conflict.

Figure 8

Since the outbreak of the US–Israel–Iran conflict, energy markets appear to be pricing a more prolonged confrontation. Both Brent Crude and West Texas Intermediate have climbed above $90 per barrel (as of March 6th), lifting coal and European natural gas prices and signaling expectations of sustained disruption rather than a short-lived shock.

The energy price surge suggests that Iran retains the ability to impose meaningful costs on United States and Israel operations—contrary to earlier mainstream assumptions of a swift resolution.

Combined with Donald Trump’s demand for Iran’s “unconditional surrender,” the probability of a protracted confrontation rises, with potentially serious consequences for global markets.

More broadly, the conflict may reflect a deeper structural shift toward the militarization (Bushido/Sparta) of the global economy (previously discussed)—a transition toward what could be described as a modern war economy.

Intensifying strategic rivalry between major powers increasingly resembles the dynamics described in the Thucydides Trap, where rising and established powers enter periods of heightened confrontation.

In this context, several entwined structural forces may be reinforcing the escalation dynamic:

the neoconservatives, dogmatic practitioners of strategic hegemonic doctrines such as the Wolfowitz Doctrine,
the deepening influence of the military-industrial complex first warned about by Dwight D. Eisenhower,
the geopolitical influence of lobbying organizations such as American Israel Public Affairs Committee, to promote Greater Israel and
the role of ultra-loose monetary policy by the Federal Reserve in facilitating large-scale deficit spending, funding military expenditures.

Taken together, these forces—what might be described metaphorically as the “four horsemen” of the deepening war economy—risk reinforcing a cycle in which expanding military spending, protectionism, and the weaponization of finance and energy reshape the global economic order.

If sustained, such dynamics could crowd out productive investment, deepen geopolitical fragmentation, and increase the probability that regional conflicts evolve into broader geopolitical confrontation—World War III—alongside rising risks of financial instability.

XIII. Systemic Shock Scenario

Taken together, these channels illustrate how a regional conflict could evolve into a broader systemic shock.

Energy markets, global supply chains, financial markets, remittances and tourism flows are deeply interconnected. A prolonged conflict could therefore produce cascading effects across trade, inflation, capital flows, and financial stability.

For economies with strong domestic savings buffers, such shocks can often be absorbed through internal financing capacity.

For economies operating with a persistent savings-investment gap, however, external disturbances can rapidly translate into currency pressure, rising yields, and financial volatility.

The Middle East conflict did not create the Philippines’ structural vulnerabilities.

But by simultaneously pressuring energy prices, supply chains, capital flows, and financial markets, it may reveal the limits of an economic model that relies on debt-financed investment amid chronically weak domestic savings.

XIV. Conclusion: The Real Constraint: Savings Scarcity in a Volatile World

The escalation of the Middle East conflict ultimately highlights a deeper structural reality confronting the Philippine economy.

Statistics record the past, but the savings–investment gap is inherently forward-looking. Investment decisions occur ex-ante, while national accounts measure the results only after the fact.

The Philippines is attempting to sustain an IDEOLOGICAL development premise in which investment spending remains substantially above the domestic savings rate the economy generates. The resulting imbalance must therefore be continuously bridged through higher taxation, expanding public debt (and thus higher future taxes), financial repression through inflation, or reliance on external capital flows.

Such a structure can function during periods of easy global liquidity and relative geopolitical stability. But it becomes increasingly fragile when conditions shift—whether through rising energy prices, supply chain disruptions, tightening financial conditions, or other manifestations of unsustainable economic dynamics (external or internal).

In that environment, the true constraint on economic expansion is no longer the willingness to invest, but the availability of real savings capable of financing that investment without destabilizing the financial system.

The Middle East conflict did not create this imbalance.

It merely revealed how narrow the Philippines’ margin of financial stability may already be.

_____

Selected References

Prudent Investor Newsletters, Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks, Substack March 01, 2026

Prudent Investor Newsletters, PSE Divergence Confirmed — The September Breakout That Redefined Philippine Mining in the Age of Fiat Disorder Substack October 08, 2025

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

noreply@blogger.com (Unknown) — Sun, 01 Mar 2026 09:18:00 +0000

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But perceptions shift late in the cycle. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold—Doug Noland

In this issue

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

I. PSEi 30’s Early Start: A Strong Tape — On the Surface

II. Headline Strength vs. Structural Fragility

III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance

IV. Breadth and Liquidity: Gains with Caveats

V. Confidence Policy and Market Structure Risk

VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities

VII. Conclusion: When Index Strength Outruns Market Health

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

Index strength masks concentration, policy engineering, and rising geopolitical fragility

I. PSEi 30’s Early Start: A Strong Tape — On the Surface

The PSEi 30 closed the week up 2.26%, pushing its 2‑month return to 9.22%—one of the strongest early-year performances in recent years.

Figure 1

The Philippine market appears to be benefiting from abundant global liquidity and rotational flows. Last year’s Asian laggards—Thailand and the Philippines—are now among the top YTD performers, alongside continued momentum in high flyers such as South Korea, Taiwan, Japan, and Singapore. (Figure 1, upper window)

Yet the strength has emerged despite an “unexpected” Q4 GDP slowdown to 3%.

In February alone, the PSEi 30 posted a 4.46% MoM and 10.22% YoY gain. (Figure 1, lower table)

The divergence between slowing output and rising asset prices was not organic—it was liquidity-driven, fueled by foreign inflows and heavy concentration in select index names.

The tape is strong. The base is narrow.

II. Headline Strength vs. Structural Fragility

Cap-weighted indices increasingly function less as barometers of broad market health and more as mirrors of heavyweight concentration.

This is not unique to the Philippines. The MSCI World Index, for example, is heavily skewed toward the United States and further concentrated in mega-cap technology firms.

But scale matters.

In deep, liquid markets, concentration often reflects earnings dominance, structural passive flows, and sustained institutional participation. While representation may be distorted, price discovery remains broadly competitive.

Figure 2

By contrast, in thinner markets, rising concentration is compounded by shallow turnover and limited participation. In such conditions, late-session or post-recess “afternoon delight” flows, along with pre-close (5-minute float) coordinated pump-dumps targeting heavyweight stocks, can exert an outsized influence on index levels. (Figure 2, topmost pane)

The outcome is not simply greater concentration, but structural fragility — where headline index strength may owe more to liquidity conditions, market microstructure, and political dynamics than to broad-based economic vitality.

Index gains, therefore, should not automatically be interpreted as evidence of systemic health.

In shallow markets especially, strength at the top can coexist with weakness underneath.

III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance

Performance has become increasingly concentrated.

International Container Terminal Services, Inc. (ICTSI) now dominates index and sector dynamics:

Services index: +10.3% MoM, +45.74% YoY, +19.82% YTD (February 2026)
ICTSI share of services sector volume: 52.35%
Services sector share of main board value: ~35%

ICTSI’s weight in the Services Index rose from 55.31% in January to a record 56.4% in February. (Figure 2, middle diagram)

Its share of main board turnover increased from 15.32% to an all-time high of 18.48%, approaching the 19.8% peak recorded by PLUS during its July melt-up.

Last February, foreign fund flows accounted for 16% of ICTSI’s total turnover—the highest level since at least October 2025 (Figure 2, lowest graph)

Figure 3

Within the PSEi 30, ICTSI’s weight surged to a record 19.3% on February 25, closing the week at 18.9%, as of February 26th. (Figure 3, topmost image)

The top five heavyweights now account for 51.51% of the entire index or five issues comprise more than half of the PSEi 30.

This means: A 1% move in ICTSI contributes nearly as much to index performance as several smaller constituents combined.

This is mechanical leverage embedded in construction.

That is not breadth — it is structural leverage.

February’s advance saw 20 issues rise, 9 decline, and 1 unchanged, with an average gain of 3.92% — slightly below the 4.46% free-float index gain, illustrating the impact of cap weighting. (Figure 3, middle graph)

Year-to-date, ICTSI’s +26.23% outperformance has amplified this divergence. Among the top ten stocks (71% of index weight), gains were supported by AC, JFC, MBT, and MER, yet the average gain of the 19 advancing issues was 6.8% — still below the 9.22% index gain. (Figure 3, lowest chart)

That February and YTD gap is weighting. This is not just concentration.

It is weight-amplified performance dispersion.

IV. Breadth and Liquidity: Gains with Caveats

Figure 4

The PSE’s market breadth improved modestly in February, extending January’s gains and helping buoy sentiment for the first time since 2019. (Figure 4, topmost diagram)

Main board volume rose 16%, marking its second consecutive year of improvement. However, aggregate figures mask internal concentration, with ICTSI absorbing a substantial portion of incremental flows. (Figure 4, middle visual)

Improvements in breadth have not been proportionately reflected in volume distribution or broader technical structures.

V. Confidence Policy and Market Structure Risk

The PSEi bottomed in mid-November 2025 — shortly before the appointment of a prominent tycoon to the Finance Department. (Figure 4, lowest image)

Prior to this, a three-way energy deal involving SMC, MER, and AEV was announced.

Subsequently:

Real Property Taxes (RPTs) were suspended for energy firms.
GEA-ALL subsidies to renewables were shifted to consumers.
Banking system net claims on government surged to record highs in December.

These are not neutral developments.

Figure 5

Expanded fiscal financing through the banking system injects liquidity that can spill into asset markets. (Figure 5, topmost window)

Support measures for key corporates improve earnings visibility and collateral value.

Infrastructure and energy subsidies reinforce balance sheet narratives for dominant index constituents.

San Miguel shares initially led the PSEi 30 higher in Q4 2025 but have since given up more than half of their gains. (Figure 5, middle graph)

MER and AEV shares joined the shindig along with the PSEi 30. (Figure 5, lowest chart)

In this context, confidence appears to be a central component of policy transmission—whether through the Bangko Sentral ng Pilipinas or the Department of Finance—aimed at stabilizing sentiment, supporting collateral values, and encouraging distributional effects into GDP. However, confidence-driven liquidity does not eliminate underlying structural fragility, particularly in a concentrated and thin market environment.

It merely elevates sensitivity to shocks.

VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities

The renewed outbreak of conflict in the Middle East involving the United States, Israel, and Iran introduces immediate geopolitical risk premia into global markets, with energy serving as the primary transmission channel.

However, the duration of the conflict matters significantly. A short-lived escalation may generate temporary price spikes, while a prolonged confrontation would embed a more persistent risk premium across commodities and financial assets.

Globally, any credible threat to Iranian production—or worse, disruption of the Strait of Hormuz—could trigger sharp upside volatility in oil prices. Roughly 20% of the global oil supply passes through the Strait of Hormuz. Even without a physical blockade, elevated risk alone tightens supply expectations and lifts futures curves.

Higher crude prices would feed into transportation, manufacturing, and electricity costs, raising the probability of a renewed inflation impulse.

Central banks could face a stagflationary dilemma: tolerate higher inflation or tighten policy into weakening growth.

Financial markets would likely reflect classic risk-off dynamics—strength in oil and gold, alongside pressure on broad equities, particularly in energy-importing economies.

For the Philippines, these global effects would be amplified by structural vulnerabilities. As a net oil importer, higher crude prices would directly raise domestic fuel, power, and logistics costs. According to the World Bank, Philippines net imports of energy use amounts to 54% as of 2022.

This would place upward pressure on CPI and household expenses, further squeezing consumption—the (savings-investment gap) backbone of Philippine GDP.

It would also increase pressure on debt-financed deficit spending, particularly as fiscal financing partly relies on foreign portfolio and external savings to bridge funding gaps. Higher global rates and a weaker peso could raise borrowing costs and heighten refinancing risks.

A widening trade deficit driven by higher import bills would likely weaken the peso, reinforcing imported inflation pressures.

This dynamic complicates policy for the Bangko Sentral ng Pilipinas. Any resurgence in inflation expectations could delay easing or necessitate tighter financial conditions, raising borrowing costs for property, consumer credit, leveraged corporates, and public finance. The resulting environment carries stagflationary characteristics: slower growth combined with sticky prices, increasing duration risk, interest-rate volatility, and credit risk across the financial system and the broader economy.

As such, equity implications would be uneven—mostly adverse.

Figure 6

Energy and mining shares may respond positively to higher commodity prices, particularly upstream oil and gas producers and exploration firms that directly benefit from rising metal and crude prices. (Figure 6, upper chart)

The Philippine mining and oil index has already been outperforming and diverging from the PSEi 30, suggesting early sectoral rotation toward commodity-linked exposures. Escalation in the Middle East would likely reinforce this divergence by sustaining risk premia in the gold and energy markets. (Figure 6, lower graph)

In contrast, downstream refiners, distributors, and power utilities—especially those operating under regulated tariffs or fixed contracts—may face margin compression as input costs rise faster than they can be passed through.

Transport, logistics, and consumer-facing sectors would similarly come under pressure from elevated fuel and operating expenses, alongside a further erosion of household purchasing power.

At the macro level, sustained deficit financing in a higher-rate environment could intensify crowding-out effects, as government borrowing absorbs liquidity that might otherwise support private sector investment. Combined with a declining standard of living and rising cost pressures, this raises the risk of credit stress and higher default rates across vulnerable households and leveraged firms.

An additional layer of vulnerability lies in Overseas Filipino Worker (OFW) remittances. The Middle East remains a major employment hub for Filipino workers. Escalation or regional instability could disrupt employment conditions (estimated 2.2 million OFWs in the Middle East), delay remittance flows, or prompt repatriation risks. While remittances have historically shown resilience even during regional tensions, heightened uncertainty could dampen household confidence and consumption at the margin—particularly when layered onto rising domestic inflation.

In sum, the conflict raises the probability of a commodity-driven inflation shock superimposed on already liquidity-sensitive markets.

For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks.

In such an environment, tactical positioning and selective exposure are likely to be more prudent than broad-based risk allocation.

VII. Conclusion: When Index Strength Outruns Market Health

The PSEi 30’s early-year advance is best understood as a liquidity-driven, weight-amplified rally rather than evidence of systemic market strength. With ICTSI alone approaching one-fifth of total index weight and the top five constituents exceeding half of the index, performance has become increasingly mechanical—driven by where liquidity concentrates, not how widely it is distributed.

This structure matters. In a cap-weighted index operating within a thin market, marginal flows into heavyweight stocks can produce outsized headline gains even as broader conditions remain fragile.

As geopolitical risks intensify—particularly through energy prices, inflation pressures, and policy constraints—the same index mechanics that amplified the rally could just as easily magnify downside volatility.

In this context, selective and tactical exposure is more defensible than broad risk allocation. Headline strength may persist, but it should not be mistaken for resilience.

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

noreply@blogger.com (Unknown) — Sun, 15 Feb 2026 03:49:00 +0000

If you depreciate the money, it makes everything look like it’s going up – Ray Dalio

In this issue:

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

I. Nota Bene—Data Revision and Structural Divergence

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal

III. The Wile E. Coyote Phase: Optics in Motion

IIIA. Broad-Based Plateauing Across Core Sectors

IIIB. Liquidity Redirected, Not Transmitted

IIIC. The NPL Paradox

IIID. Duration Losses Surface First

IIIE. The Redistribution of Strain

IIIF. Reserve Cuts: Policy Choreography in Motion

IIIG. Late-Cycle Containment

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

Stability by Refinancing: The Philippine Banking System Under Containment

I. Nota Bene—Data Revision and Structural Divergence

The BSP revised December’s currency-in-circulation growth from 17.7% to 6.4%. This does not alter the central observation: liquidity creation at the monetary authority level continues to exceed the pace of circulation in the broader economy, which highlights the opacity of late-cycle aggregates. The argument herein rests on persistent balance-sheet divergence, or that stability is maintained through optics rather than fundamentals.

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not

Liquidity is not only rising — it is accelerating again. Money supply is trending higher. Policy rates have been cut. Reserve requirements have been reduced. Deficit spending has widened toward levels last seen during the pandemic. Yet GDP growth has slowed markedly: Q4 2025 expanded just ~3 percent year-on-year, bringing the full-year growth to ~4.4 percent, the slowest post-pandemic pace outside the crisis period.

When liquidity expands as output contracts, the question is no longer about stimulus. It is about containment — and about who ultimately absorbs the risk.

Figure 1

In our previous post, we noted that the BSP’s currency issuance — or currency in circulation on the central bank’s books — surged by initially reported ~17.7 percent in December to a historic Php 3.205 trillion (Php 2.897 trillion revised). (Figure 1, topmost and middle charts)

In the same month, however, currency outside depository corporations — the stock of cash actually held by the public — grew only ~6.6 percent to Php 2.522 trillion. The gap between issuance (as captured in the Monetary Authorities Survey) and circulation outside banks (as captured in the Depository Corporations Survey) is the widest on record.

This unprecedented growth differential signals a breakdown in monetary transmission. Liquidity is being created at the central bank level, yet it is not translating into proportional expansion of cash held by the public. Instead, it is accumulating within the banking and sovereign balance-sheet perimeter.

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage

Despite the revision, broad money and financial system leverage metrics have pivoted higher. (Figure 1, lowest image)

Monetary aggregates (M1 and M2) and domestic claims relative to GDP moved back up in Q4, reaching roughly 70.4 percent, 71.8 percent, and 80.6 percent, respectively — levels consistent with tighter financial balance-sheet conditions.

Domestic claims, which include net claims on the central government (NCoCG) and claims on other sectors, broadly measure credit leverage within the financial system.

In 2025, lending to the government accounted for ~27.2 percent of total claims (slightly higher than in 2024), while lending to the private sector was ~72.8 percent (slightly lower than in 2024), even as overall claims rose ~10 percent YoY and M1/M2/M3 expanded by 7.1 percent, 7.5 percent, and 7 percent YoY, respectively.

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction

Fiscal metrics underscore the scale of backstopping. As of end-November 2025, the national government’s budget deficit reached ~Php 1.26 trillion for the first eleven months — second only to the pandemic year 2020 on a cumulative basis, and representing ~81 percent of the government’s full-year Php 1.56 trillion target. Total revenues rose modestly, while expenditures continued to outpace them, driving the gap.

Figure 2

The impact of accelerating liquidity is increasingly visible in financial markets.

The PSEi 30 has rallied alongside higher turnover despite slowing GDP, while the yield curve has steepened at the front even as long-end yields remain elevated — suggesting that liquidity is facilitating issuance absorption and duration risk transfer rather than signaling stronger real-economy prospects. PSE & PSEi chart data based on original MAS data. (Figure 2, topmost and second to the highest windows)

Philippine Treasury market turnover reached record levels in 2025. But volume alone is an incomplete signal of improved confidence. High turnover can reflect repositioning, dealer balance-sheet management, policy alignment, geopolitical shock absorption, or constrained domestic savings with limited real-economy outlets. (Figure 2, second to the lowest image)

The curve matters more than the prints: its slope embeds term premium, duration appetite, and credibility. (Figure 2, lowest diagram)

If confidence were broad-based and durable, normalization would occur across tenors. Instead, activity remains selective, slopes unstable, and duration demand cautious—liquidity without conviction.

Across equities, fixed income, and foreign exchange, the pattern is consistent: liquidity is sustaining financial asset turnover while real-economy transmission weakens

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal

The peso tells a similar story. Periodic strength has coincided with weak-dollar phases and sovereign borrowing inflows, yet the underlying savings–investment gap and elevated fiscal financing requirements continue to exert structural pressure.

The Philippine government raised approximately USD 2.75 billion from global capital markets in January.

Over the past weeks, USD/PHP has fallen from its record highs to test the 58 level.

Exchange-rate stability appears less a reflection of external balance improvement than of active liquidity management and capital flow support.

A key structural signal lies in the growing divergence between the BSP’s Monetary and Financial Statistics (MAS) and the Depository Corporations Survey (DCS). The MAS consolidates the central bank’s balance sheet plus the national government’s monetary accounts, including direct currency issuance and central bank operations. The DCS, by contrast, consolidates the balance sheets of the BSP and all other deposit-taking institutions (commercial banks, thrift banks, rural banks, etc.), presenting money supply and credit aggregates after eliminating intra-system holdings. This methodological difference means the MAS can register rapid currency issuance that does not immediately appear in the broader economy’s cash circulation as captured by the DCS — a gap that has rarely been this wide.

This divergence — excess monetary creation not translating into commensurate growth in broad money or real economic activity — reflects a balance-sheet recession dynamic, where traditional monetary accommodation fails to circulate through productive economic channels.

As banks and firms prioritize balance-sheet repair over fresh productive lending, excess liquidity remains trapped within the financial system. Consistent with Hyman Minsky’s financial instability hypothesis and Richard Koo’s balance-sheet recession framework, monetary accommodation increasingly sustains asset turnover and duration/risk transfer rather than output, employment, or external balance improvement.

III. The Wile E. Coyote Phase: Optics in Motion

December’s banking data do not depict stabilization. They depict redistribution.

Slower lending growth emerged despite a string of interest rate cuts — a development even the mainstream press finally acknowledged.

Universal and commercial bank lending (net of repos) rose 9.2% year-on-year in December — the softest expansion since February 2024’s 8.6%.

The news pointed to a 5.4% contraction in lending to construction firms, attributing the slowdown to reduced public spending. But construction represents only 3.7% of total bank exposure. It cannot explain system-wide deceleration.

The drivers were broader — and deeper.

IIIA. Broad-Based Plateauing Across Core Sectors

Three major sectors — accounting for roughly 42% of total bank portfolios — drove the slowdown.

Manufacturing (8.6% share) contracted 9.43% year-on-year in December, its seventh consecutive monthly decline and the second-deepest contraction since September 2025’s 10.44% drop.
Real estate (≈20% share) — the system’s largest borrower — slowed to 8.3% growth, its weakest pace since October 2023.
Consumer lending (13.5% share) — previously the fastest-growing segment — decelerated to 21.4%, the slowest since September 2022. This follows an extraordinary 33-month streak of growth exceeding 22%.

This is not marginal noise.

Figure 3

Credit expansion appears to be plateauing across its core engines, as bank lending to both the production sector and households shows signs of inflection. (Figure 3, topmost pane)

Meanwhile, GDP growth has slowed for two consecutive quarters — from 3.95% in Q3 to 3% in Q4. (Figure 3, middle image)

Rate cuts were marketed as stimulus. Yet lending momentum peaked as output weakened.

IIIB. Liquidity Redirected, Not Transmitted

As lending to the general economy softened, activity within the financial system intensified.

Interbank lending and reverse repurchase transactions (with both the BSP and other banks) surged toward milestone highs. (Figure 3, lowest graph)

Figure 4

Bank borrowings from capital markets jumped 17.3% to an all-time high of Php 1.96 trillion, largely reflecting bond positioning. Bills payable also rose to one of the highest levels on record. (Figure 4, top and second to the highest images)

Net claims on the central government increased 10.8% to a fresh record of Php 6.135 trillion. Duration exposure deepened. (Figure 4, second to the lowest diagram)

Yet Held-to-Maturity (HTM) securities increased only modestly (+1.2% YoY), despite the BSP’s reclassification of these instruments under “debt securities net of amortization.”

Risk did not disappear — it moved.

Despite liquidity injections, bank cash balances contracted 19.5% year-on-year in December.

Cash-to-deposit and liquid-asset-to-deposit ratios improved slightly but remain strategically low. (Figure 4, lowest visual)

System liquidity appears abundant in headline aggregates.

At the transactional margin, it is thin.

IIIC. The NPL Paradox

Figure 5

Non-performing loans had been rising alongside slowing GDP through Q3.

In November, they softened modestly. In December, they fell sharply. (Figure 5, topmost and middle graphs)

Gross NPLs declined in peso terms — not merely as a ratio effect — even as output had weakened for two consecutive quarters. While year-end charge-offs, restructurings, and classification adjustments can produce seasonal improvements, the magnitude of the drop contrasts with deteriorating macro conditions.

Either borrowers experienced an abrupt recovery amid a slowdown — or recognition dynamics shifted.

There are only a handful of mechanical pathways through which NPL ratios decline in such an environment:

Restructurings
Charge-offs
Denominator expansion
Regulatory relief
Classification effects

The burden of proof shifts to fundamentals.

IIID. Duration Losses Surface First

While credit metrics improved optically, market losses intensified.

In December, Available-for-Sale (AFS) securities expanded 22% and now account for roughly 45% of financial assets, rapidly approaching Held-to-Maturity’s 48% share. (Figure 5, lowest chart)

Figure 6

Despite generally easing Treasury yields, financial investment (accumulated) losses surged in December from Php 1.98 billion in November to Php 20.16 billion. (Figure 6, topmost pane)

For Q4, losses on financial assets reached Php 42.396 billion — the third consecutive quarter exceeding Php 40 billion — levels previously seen only during the pandemic recession. (Figure 6, middle diagram)

Full-year 2025 financial asset losses totaled Php 159.7 billion, materially weighing on profitability. Banking system net income growth slowed sharply: Q4 net income declined 0.78% year-on-year, while full-year 2025 profit growth decelerated to 3%, down from 9.8% in 2024.

From Q3 to Q4, return on assets (ROA) decreased from 1.46% to 1.41%, and return on equity (ROE) declined from 11.71% to 11.46%, suggesting both measures may be beginning to trend downward. (Figure 6, lowest chart)

The pressure came less from exploding credit costs than from market volatility. This is not synchronized improvement. It is stress migration.

IIIE. The Redistribution of Strain

When securities losses rise, repo dependence increases, sovereign absorption intensifies, liquidity buffers remain fragile — yet NPL metrics improve abruptly — the pattern is not stabilization.

It is reallocation.

Late-cycle systems often preserve surface calm by shifting where strain appears:

Duration losses surface before credit losses.
Market volatility compresses earnings before defaults spike.
Provisioning pressure eases as classifications adjust.
Headline ratios improve even as balance sheets stretch.

This is the AFS Wile E. Coyote dynamic accelerating. The system appears suspended — supported by liquidity, refinancing structures, sovereign absorption, and accounting elasticity — even as underlying cash-flow conditions soften.

Stability is maintained through motion, not repair.

IIIF. Reserve Cuts: Policy Choreography in Motion

In February 2026, the BSP cut reserve requirements across bank-issued bonds, mortgage instruments, and trust accounts. Reserves on bonds fell from 3% to 2% for universal and commercial banks; thrift banks saw their 6% requirement scrapped; long-term negotiable deposits lost their 4% ratio; and most strikingly, trust and fiduciary accounts dropped to zero from double-digit levels.

The BSP framed the move as liquidity-neutral, but the timing betrays intent: this was balance-sheet relief, not growth. Banks absorbing securities losses, repo dependence, and sovereign absorption were granted regulatory breathing room.

This is choreography, not repair. Reserve cuts thin liquidity buffers to ease optics, shifting fragility from bank balance sheets into the broader system. Once again, containment through redistribution, not stabilization.

IIIG. Late-Cycle Containment

This pattern aligns with Minsky’s late-cycle stabilization phase: fragility becomes politically and financially intolerable, prompting increasingly active management of volatility and balance-sheet optics. Stability is no longer organic — it is administered.

It also echoes Kindleberger’s late-cycle dynamics, where imbalances are contained and recognition deferred. Transparency thins. Risk redistributes. The system appears calm — until price signals overwhelm narrative control.

It resembles Kornai’s soft-budget constraint dynamic: losses are socialized, recognition deferred, discipline diluted.

The system is being managed.

But when liquidity sustains refinancing more than output, when duration risk migrates faster than credit risk, and when monetary aggregates expand faster than money circulating in the real economy, the adjustment rarely announces itself through ratios.

It accumulates quietly on balance sheets. Then it emerges through prices — often abruptly.

And economics does not yield to optics.

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

Figure 7

The Philippine financial system is highly concentrated. Banks control roughly 83.1% of total financial assets, with universal and commercial banks accounting for about 77.4% (as of December 2025). (Figure 7, upper chart)

At the same time, the PSEi 30 is itself concentrated in a handful of large-cap names.

Since 2024, the top five heavyweights have accounted for over 50% of the index weight. This concentration has been led by ICTSI, which not only surpassed former leader SM Investments but, through a string of record highs, has pushed its weight in the PSEi 30 to over 18%— a single issue now accounts for nearly one-fifth of the headline index’s performance! (Figure 7, lower graph)

In such an environment, late-session flows (“afternoon delight” or “pre-closing” activity) into a small number of index-heavy stocks can have disproportionate effects on headline market performance. Whether driven by liquidity management, portfolio rebalancing, balance-sheet considerations, or index performance objectives, this clustering of activity near the close raises questions about the quality and integrity of price discovery.

This is not merely a capital markets issue.

When asset prices become reference points for macro stability—and when large financial institutions sit at the center of both credit creation and market intermediation—price management, volatility smoothing, and liquidity containment can feed back into balance sheets.

The result is a reflexive loop:

Market stabilization supports balance-sheet optics.
Balance-sheet stability reinforces the narrative of macro resilience.

But when stabilization becomes a policy objective—whether in equity indices, exchange rates, or the yield curve—intertemporal trade-offs accumulate.

Those trade-offs do not disappear. They re-emerge in funding structures, duration exposure, and income volatility—and ultimately in market volatility.

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion

What we are observing is not a conventional stimulus cycle. It is a containment cycle.

Liquidity is growing — but circulation is narrowing.
Credit is refinancing — but not compounding productive output.
Market turnover is rising — even as real growth decelerates.

This is consistent with the balance-sheet recession dynamic outlined previously: private sector caution meets public sector duration absorption, while monetary aggregates expand within the institutional perimeter.

In such a regime, risk does not disappear. It migrates.

Credit risk becomes duration risk.
NPL ratios improve through denominator expansion.
Volatility compresses through active management.

But arithmetic remains.

When liquidity sustains rollover more than real investment, growth slows even as balance sheets expand. And when duration risk concentrates faster than income growth, the system becomes increasingly sensitive to price signals rather than flow indicators.

The adjustment, when it comes, is rarely triggered by one dramatic data release. It emerges when price discovery outpaces narrative control.

That is late-cycle dynamics.

Policy stimulus eventually fails not because liquidity stops expanding — but because the real capital base can no longer validate the financial claims built upon it.

Narratives may shape perception, but only economics compounds

____

Reference:

Prudent Investor Newsletter, Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown, Substack, February 08, 2026

Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown

noreply@blogger.com (Unknown) — Sun, 08 Feb 2026 00:57:00 +0000

People don’t realize how hard it is to speak the truth to a world full of people who don’t realize they’re living a lie– Edward Snowden

In this issue

Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown

I. Q4 GDP Plunge: From Accommodation to Balance-Sheet

IA. Not a Shock, a Signal: Context Before the Q4 GDP Collapse

IB. Policy Accommodation Without Growth

IC. From Accommodation to Balance-Sheet Stress: The Currency Signal

ID. Debt-Financed Growth: When GDP Expansion Is Fully Absorbed by the State

IE. Liquidity Without Output: January CPI as Leakage

IF. Labor Market Confirmation, Not Contradiction

II. Why Institutions Miss Turning Points

IIA. The Jobs and Poverty Paradox

IIB. Corruption as Symptom, Not Cause

IIC. Public Spending Held Up — It Was Construction That Slumped, and Households That Broke

IID. Crowding Out and the Long Decline of Household Consumption

III. Select GDP Highlights

IIIA. Industrial Stress: Electricity GDP Enters Recession, Policy Scaffolding: Stabilizing Cash Flows, Not Demand

IIIB. Export Strength Without Domestic Production; External Demand Masks Weak Domestic Absorption

IIIC. Trade Expansion Signals Supply-Side Outgrowth; Real Estate Growth Amid Record Vacancies

IIID. Financial Sector Expansion Through Refinancing and Forbearance

IIIE. The Core Contradiction: GDP Without Balance-Sheet Healing

IV. Political Economy as Verdict, Not Sidebar

IVA. Entrenchment, Not Episodic Failure

IVB. The Political Economy Loop

IVC. Conclusion Spending as Sacred — Cost as Afterthought

Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown

Why record liquidity, rising debt, and policy accommodation failed to revive growth

I. Q4 GDP Plunge: From Accommodation to Balance-Sheet

IA. Not a Shock, a Signal: Context Before the Q4 GDP Collapse

Several things must be established before discussing the jarring drop in Philippine economic performance to 3.0% in Q4 2025 and 4.4% for full-year 2025.

This was not an isolated surprise. Q3 2025 GDP was revised downward from 4.0% to 3.0%, retroactively weakening what was already a soft quarter.

Q4 then arrived as yet another "shocker," printing well below consensus estimates clustered around 4.0–4.2%, mirroring forecasting failures seen repeatedly at major inflection points.

IB. Policy Accommodation Without Growth

The slowdown occurred despite aggressive policy accommodation.

Figure 1

Since mid-2024, the BSP has clearly shifted toward easing. Policy rates were reduced cumulatively, reserve requirements were cut sharply, and bank deposit insurance coverage was doubled — all measures explicitly designed to support liquidity, stabilize the banking system, and revive credit transmission. At the same time, fiscal deficits returned to near-pandemic magnitudes. (Figure1, upper window)

Yet growth continued to deteriorate.

This divergence between policy stimulus and economic outcome is the central puzzle that headline narratives avoid.

IC. From Accommodation to Balance-Sheet Stress: The Currency Signal

The divergence between aggressive policy accommodation and deteriorating growth did not remain abstract. It surfaced explicitly in the monetary data.

In December, currency in circulation/currency issuance surged by a staggering 17.7% year-on-year (YoY), marking the largest net increase in peso issuance on record, exceeding even the BSP’s pandemic-era liquidity response in 2020! (Figure 1 lower chart)

Importantly, this spike occurred on top of an already elevated currency base, pushing the peso stock to a new structural high rather than merely reflecting a low base effect.

This was not a seasonal cash phenomenon. Nor was it demand-driven. The surge coincided with GDP growth slowing to 3.0%, rising bond yields, and mounting evidence of balance-sheet strain across the financial system.

In past cycles, expansions of this magnitude occurred only under acute stress conditions.

The mechanics matter.

By late 2025, banks had absorbed unprecedented government duration. Net claims on the central government (NCoCG) rose 11% year-on-year to a record Php 5.888 trillion (as of November 2025), while hold-to-maturity securities (HTM) climbed to Php 4.077 trillion, locking balance sheets into long-dated, illiquid assets amid a rising yield environment.

Figure 2

Liquidity buffers have been deteriorating quietly for years: cash-to-deposit ratios have fallen to all-time lows, while liquid-assets-to-deposit ratios have retraced to levels last seen during the 2020 pandemic stress episode. (Figure 2, topmost pane)

December exposed the constraint. Liabilities to other depository corporations (ODC) collapsed by 35.5%, consistent with banks drawing down reserves toward effective reserve-requirement limits, while BSP bills outstanding declined sharply, signaling that banks were no longer willing or able to park liquidity even in short-term central bank instruments. With reserves and bills exhausted, liquidity preference shifted toward base money. (Figure 2, middle image)

The BSP accommodated this shift through record currency issuance, not to stimulate demand, but to prevent funding and settlement stress. This was not FX-driven monetization: headline reserve stability or international reserves was supported largely by gold valuation effects, foreign investments declined, and net foreign assets rose only modestly and liability-heavy. Peso liquidity creation occurred domestically, as a balance-sheet response to system-level strain.

The Philippine treasury yield curve confirms the diagnosis. A bearish flattening from the front to the belly, alongside rising long-end yields, indicates tightening financial conditions despite liquidity injection. Monetary accommodation failed to translate into easier credit or stronger activity; instead, it morphed into defensive liquidity provision.

In this context, the record surge in currency issuance was not an anomaly — it was a signal. Policy support did not revive growth because it was absorbed by balance-sheet repair, fiscal absorption, and liquidity preservation rather than by new consumption or productive investment.

ID. Debt-Financed Growth: When GDP Expansion Is Fully Absorbed by the State

2025 underscored the MOST critical — and least acknowledged — feature of recent Philippine GDP growth: its dependence on public debt expansion.

Public debt rose 10.32% year-on-year, increasing by Php 1.656 trillion from Php 16.051 trillion to a record Php 17.71 trillion.

Over the same period, nominal GDP (NGDP) increased by Php1.568 trillion, rising from Php 26.224 trillion in 2024 to Php 28.014 trillion, while real GDP expanded (RGDP) by just Php 979.5 billion, from Php22.244 trillion to Php23.223 trillion. (Figure 2, lowest diagram)

Outside of the pandemic recession, this marks the first instance in modern Philippine data where the net increase in public debt EXCEEDED the net increase in nominal GDP. Put differently, the entirety of net economic expansion was fully matched — and slightly surpassed — by new government borrowing, even before accounting for private-sector leverage.

This distinction matters. Conventional debt-to-GDP metrics obscure the underlying dynamic because deficit-financed spending has become the primary driver of GDP itself. In such a regime, rising debt ratios no longer merely reflect cyclical stimulus; they signal structural centralization of economic activity, where incremental growth accrues increasingly to the public sector while private balance sheets stagnate or retrench.

Figure 3

Consistent with this shift, the public debt-to-GDP ratio climbed sharply from 60.7% in 2024 to 63.2% in 2025, the highest level since 2005. Rather than indicating temporary countercyclical support, the data point to a growth model in which more government activity SUBSTITUTES for — rather than catalyzes — private-sector expansion. (Figure 3, topmost graph)

GDP rose. But balance-sheet healing did not.

IE. Liquidity Without Output: January CPI as Leakage

January’s 2% CPI (inflation) print should not be read as a demand revival. It is better understood as liquidity leakage — the price-level consequence of record peso issuance interacting with constrained supply, weak productivity, and balance-sheet stress.

Following the BSP’s late-2025 liquidity surge — coinciding with record currency issuance and a historic USDPHP depreciation — headline CPI rose to 2.0%, officially attributed to rents and utilities. This attribution is revealing rather than exculpatory. Housing costs and regulated utilities are precisely the sectors most sensitive to excess liquidity, FX pass-through, and policy-mediated pricing, not organic demand strength. (Figure 3, middle visual)

Crucially, this inflation impulse arrived without a corresponding expansion in real output or household purchasing power. As shown earlier, the net increase in GDP was fully absorbed by public debt expansion, leaving little room for private-sector income growth. Liquidity thus surfaced not as consumption-led growth, but as cost pressure, disproportionately borne by middle- and lower-income households.

The electricity sector provides a concrete transmission channel. With real electricity GDP already in recession, policy interventions — including RPT accommodations, GEA-mandated pass-throughs, and the SMC–AEV–Meralco restructuring framework — function as cash-flow stabilizers rather than demand enhancers. These mechanisms preserve operator solvency and bank exposures, but shift cost burdens downstream to consumers through tariffs and ancillary charges, reinforcing CPI pressures even as physical demand stagnates.

This dynamic helps explain why January CPI firmed despite weakening household fundamentals. Inflation, in this context, is not a sign of overheating. It is a symptom of liquidity misallocation — money created and absorbed within balance-sheet and regulated sectors, leaking into prices without generating commensurate output, productivity, or wage gains.

IF. Labor Market Confirmation, Not Contradiction

Employment data reinforce — rather than offset — this interpretation.

While December’s month-on-month employment figures showed little change, employment rates declined from 96.2% in Q3 to 95.6% in Q4, consistent with the multi-year deceleration in per-capita consumption. (Figure 3, lowest image)

Headline labor statistics obscure deeper structural weaknesses: persistently high functional illiteracy, declining educational proficiency from Grades 3 to 12, and deteriorating job quality limit productivity and suppress real income growth.

In this environment, modest inflation increases translate rapidly into real income compression, particularly for households with limited bargaining power and high exposure to food, rent, utilities, and transport costs.

Figure 4

Record USDPHP levels amplify these pressures through import costs and energy pricing, while liquidity-driven CPI erodes purchasing power faster than nominal wages adjust. (Figure 4, topmost pane)

The result is a stagflationary configuration: prices rising modestly but persistently, employment participation softening at the margin, and real household resilience deteriorating beneath superficially stable aggregates.

December’s employment data thus serve as validation, not a counterweight, to the inflation signal.

II. Why Institutions Miss Turning Points

This section consolidates four commonly treated as separate problems — peso-denominated GDP misreading, consensus forecasting failure, the credit-growth paradox, and principal–agent distortions — into a single institutional explanation for why macro turning points are repeatedly missed.

The repeated failure to anticipate — or even recognize — macro turning points is not accidental. It reflects structural blind spots embedded in both the data emphasized and the incentives governing their interpretation.

Public discourse fixates on percentage growth rates while neglecting peso-denominated GDP levels and trends, obscuring the extent to which recent expansions have been driven by base effects, debt-financed activity, and balance-sheet repair rather than organic demand. (Figure 4, middle chart)

When nominal output growth is examined alongside credit expansion, the disconnect becomes apparent: leverage rose, liquidity expanded, yet final demand and productive investment failed to follow.

This disconnect exposes a deeper institutional bias. Credit growth, in nominal terms, remained brisk and at record levels — but the spending it should have financed never materialized. The most plausible explanation is not an acceleration of consumption or investment, but refinancing, rollover activity, and balance-sheet preservation among already leveraged borrowers. Credit existed, but it circulated within the financial system rather than transmitting to the real economy.

Forecasting errors at major inflection points flow naturally from this framework. Consensus projections cluster safely around official targets because institutional managers optimize for career safety, benchmark adherence, and signaling compliance, not for early or accurate macroeconomic diagnosis. Being conventionally wrong is less costly than being unconventionally right — a dynamic John Maynard Keynes captured succinctly when he observed that "worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."

These principal–agent distortions ensure that warning signals — peso GDP deceleration, debt absorption, liquidity hoarding, and declining multipliers — are downplayed until they can no longer be ignored. By then, the slowdown is framed as an exogenous shock rather than the predictable outcome of accumulated imbalances.

IIA. The Jobs and Poverty Paradox

Paradoxically, authorities took a victory lap, citing exceeded targets in job creation and poverty reduction for 2025.

Weakening GDP growth, rising balance-sheet leverage, and persistent price pressures are difficult to reconcile with a sustained expansion in employment. Slower output growth constrains firms’ revenue expectations, higher leverage limits risk-taking and new hiring, and elevated input costs compress margins. Together, these dynamics weaken the incentive and capacity of firms to add jobs.

If one or all of these forces are magnified in 2026, the economy risks shifting from a cyclical slowdown to a more structural drag: employment growth could decelerate, informalization may rise, and productivity-enhancing investment could be deferred as firms prioritize liquidity preservation over expansion.

Additional regulatory pressures—such as higher minimum wages—would further complicate this adjustment, particularly for MSMEs, which account for the bulk of employment. For smaller firms with limited pricing power and thin margins, higher labor costs may translate into slower hiring, reduced hours, or a shift toward informal labor, rather than higher real incomes or improved job quality.

Once again, these dynamics are even harder to reconcile with persistently high functional illiteracy and mounting evidence of declining educational proficiency among Filipino learners from Grades 3 to 12. Weak human capital outcomes constrain labor productivity and employability, limiting the economy’s capacity to generate higher-quality jobs even in periods of credit expansion.

They are equally difficult to square with surveys that continue to report elevated self-rated poverty and hunger, notwithstanding modest improvements in Q4 2025. (Figure 4, lowest images)

Such indicators tend to lag headline growth and are highly sensitive to inflation, labor market quality, and household debt servicing costs.

As economic pressures intensify, these measures are more likely to deteriorate than improve. A slowing economy does not remain an abstract macro concept; it ultimately surfaces in household balance sheets—through weaker income growth, reduced job security, higher debt burdens, and diminished resilience to shocks.

IIB. Corruption as Symptom, Not Cause

Public discourse has instead fixated on a simplistic (black and white) equation: corruption equals low GDP equals economic paralysis.

Moral signaling may sound persuasive, but it confuses symptoms for causes.

Figure 5

Even the Philippine Statistics Authority (PSA) chart shows that recently exposed corruption scandals, including those linked to flood-control projects, merely accelerated a slowdown already underway. The deceleration began after the BSP’s banking-system rescue in 2021, with pronounced deterioration starting in Q2 2023 and intensifying over the last two quarters. (Figure 5, topmost visual)

IIC. Public Spending Held Up — It Was Construction That Slumped, and Households That Broke

Yes, real government final consumption expenditure (GFCE) slowed sequentially—from 8.7% in Q2 to 5.8% in Q3 and 3.7% in Q4, marking its weakest pace since early 2024.

Still, full-year 2025 real GFCE expanded by 9.1%, far outpacing 2024’s 7.3%. Consequently, government spending’s share of GDP rose from 14.5% in 2024 to 15.1% in 2025, equaling its 2020 level and approaching the 2021 peak of 15.3%.

In short, public spending was not cut—it increased.

The collapse occurred in government construction. The sector contracted for three consecutive quarters in 2025, effectively entering a recession (Q2: –8.2%, Q3: –26.2%, Q4: –41.9%). (Figure 5, middle image)

The downturn began in Q2 amid election-related spending restrictions and was compounded by the flood control scandal. For the full year, government construction shrank by 17.9%, pulling its share of real GDP down to 4.73% from a record 6.02% in 2024—still above pre-pandemic levels, but a sharp reversal nonetheless.

However, real government spending and construction together accounted for 19.8% of GDP in 2025—roughly one-fifth—only slightly below the record 20.5% reached in 2024 and 2021.

This indicates that the government’s drag on GDP stemmed largely from disruptions to ‘Build Better More’ projects rather than from an overall retrenchment in public spending. However, this was not the most pivotal factor behind the broader slowdown.

The weakest link was households.

Once government absorption rises and construction volatility disrupts income channels, households become the residual shock absorber

IID. Crowding Out and the Long Decline of Household Consumption

The rising share of government final consumption expenditure (GFCE) in GDP since 2005 has coincided with a persistent decline in household consumption’s share, pointing to a long-running crowding-out of private demand.

Household consumption peaked at 78.6% of GDP in 2003 and has since trended steadily lower, falling to 72.6% in 2025—among the weakest readings on record, comparable only to 2019 and 2024.

Figure 6

In 2025, household consumption per capita growth slowed to 3.7%, its weakest pace since 2021, when the BSP mounted a historic rescue of the banking system. This deceleration pulled per capita GDP growth down to 3.5%, the lowest since 2011. (Figure 6, topmost window)

However, per capita metrics mask distributional realities: income and consumption gains have been concentrated among higher-income households, while lower-income groups continue to bear the brunt of inflation, weak job quality, and rising debt burdens.

The crackdown on flood control corruption could have reverberated across its extensive network of contractors, workers, and local beneficiaries, interrupting income streams and further weighing on household consumption, with the ongoing scandal acting as an accelerant to already-existing demand weakness.

III. Select GDP Highlights

IIIA. Industrial Stress: Electricity GDP Enters Recession, Policy Scaffolding: Stabilizing Cash Flows, Not Demand

The slowdown is no longer confined to households or government spending. Real electricity GDP has slipped into a recession, a development last observed during the pandemic in Q2–Q3 2020, pointing to deeper industrial weakness.

After stagnating in Q2, electricity GDP contracted by -1.1% in Q3 2025, worsening to -2.5% in Q4—notably a quarter that is typically strong for consumption. The sector has been in a persistent downtrend since peaking in Q2 2024. (Figure 6, middle chart)

For the full year 2025, electricity GDP declined by -0.4% and accounted for 81.1% of the Electricity, Steam, Water, and Waste Management sector.

This two-quarter contraction helps contextualize the extraordinary policy and quasi-fiscal support now directed at the sector. Direct and indirect interventions—including the SMC–AEV–MER transaction, RPT suspensions, and GEA-mandated rate increases passed on to consumers—function as income transfers that stabilize sector cash flows, particularly in favor of renewable energy operators, rather than reflecting underlying demand recovery.

IIIB. Export Strength Without Domestic Production; External Demand Masks Weak Domestic Absorption

The national accounts display growing internal inconsistencies.

Real manufacturing GDP was effectively stagnant in Q3 (+1.3%) and Q4 (+1.6%), even as goods exports surged by 11.6% and 22.8%, respectively. The magnitude of export growth is too large to be explained by foreign-exchange translation or pricing effects alone. Re-exports offer only a partial explanation, as available PSA data do not indicate volumes sufficient to reconcile the gap. (Figure 6, lowest graph)

The more plausible interpretation is a decoupling between export values and domestic manufacturing value-added, weakening GDP multipliers and masking industrial stagnation.

This divergence is reinforced by the external accounts. Real exports of goods and services rose 13.2% in Q4, while imports increased by just 3.5%, signaling subdued domestic absorption.

Export performance continues to support headline GDP, but with limited spillovers into domestic production, employment, or investment.

IIIC. Trade Expansion Signals Supply-Side Outgrowth; Real Estate Growth Amid Record Vacancies

Figure 7

Despite softening household consumption, real trade GDP expanded by 4.6%, indicating supply-side outgrowth rather than demand-led expansion. This pattern raises the risk of excess capacity, inventory accumulation, and future pricing pressure, particularly in sectors already facing weak end-user demand.

The real estate sector further illustrates the disconnect between GDP and market fundamentals. Real estate GDP expanded by 4.5%, despite only marginal improvements in occupancy and persistently elevated vacancy rates.

In a functioning market, excess supply should constrain prices and turnover. The observed growth instead reflects construction pipelines, valuation effects, and policy or regulatory support, rather than successful absorption or improved affordability.

IIID. Financial Sector Expansion Through Refinancing and Forbearance

Financial sector growth follows the same logic. Financials expanded by 5.6%, led by banking and insurance, even as both consumers and producers remain under strain. This expansion reflects refinancing activity, loan restructurings, fee income, and margin preservation, aided by regulatory forbearance and delayed loss recognition, rather than new credit formation or productive risk-taking.

IIIE. The Core Contradiction: GDP Without Balance-Sheet Healing

The central question is unavoidable: if both consumers and producers are under pressure, how are large-ticket transactions being sustained?

Elevated vacancy rates should translate into slower real estate turnover and rising credit stress. The absence of immediate deterioration suggests activity is being propped up by refinancing, balance-sheet rollovers, and accounting smoothing, masking underlying fragility rather than resolving it.

Taken together, these dynamics point to an economy where headline GDP is increasingly supported by intermediation, policy scaffolding, and financial engineering, while final demand and productive capacity continue to weaken beneath the surface.

IV. Political Economy as Verdict, Not Sidebar

IVA. Entrenchment, Not Episodic Failure

Survey data reinforce what the macro data already imply. When 94% of respondents describe corruption as widespread, the issue is not episodic misconduct but institutional entrenchment. “Widespread” denotes a system that reproduces itself, not isolated moral lapses.

Recent high-profile cases — including the deportation of a foreign vlogger whose jailhouse documentation led to the dismissal of senior Bureau of Immigration officials — are not aberrations. They are visible manifestations of an underlying structure in which accountability is reactive, selective, and rarely preventative.

IVB. The Political Economy Loop

At the core lies a self-reinforcing political economy loop characteristic of ochlocratic, distribution-driven governance:

Ballots confer control.
Control enables financing.
Financing incentivizes intervention.
Intervention multiplies dysfunction.
Rinse. Repeat.

Attempts to ‘depoliticize’ aid distribution miss the structural point. Someone must still execute these programs. Congress appropriates. Bureaucracies implement. Local political actors remain embedded throughout the chain (directly or indirectly), as the flood-control scandal illustrates.

This loop explains why fiscal expansion, liquidity provision, and bailout mechanisms persist even as their growth efficacy declines.

Intervention becomes politically necessary not because it works, but because it sustains the system that authorizes it.

IVC. Conclusion Spending as Sacred — Cost as Afterthought

Public spending is no longer treated as a policy choice subject to trade-offs, but as a sacred act insulated from cost scrutiny.

Authorities now project Php 1.4 billion in Q1 2026 ‘pump-priming’ to support GDP growth, while the enacted 2026 budget has expanded to Php 6.793 trillion, a 7.4% increase over 2025—reinforcing the primacy of scale over efficiency.

What remains conspicuously absent from the discussion is the cost — and the bearer of that cost.

Recent energy bailout-style interventions — including RPT accommodations, GEA-mandated transfers, and the SMC–AEV–Meralco restructuring framework — function less as growth support than as liquidity bridges. They shift duration and cash-flow risk away from stressed operators and onto banks, consumers, and quasi-public balance sheets, reinforcing the same liquidity pressures already visible in the monetary and inflation data.

This pattern is not accidental. It reflects an embedded policy ideology, inherited from social-democratic institutional frameworks, that equates economic progress with centralization, scale, and administrative control. In such a regime, intervention becomes the default response to stress, while decentralization, market clearing, and balance-sheet discipline are treated as politically risky or socially unacceptable.

As a result, genuine market reform is perpetually deferred. Losses are smoothed rather than resolved, costs are socialized rather than priced, and liquidity is injected to preserve stability rather than to restore productivity. The system survives quarter to quarter — but at the expense of private-sector dynamism, household resilience, and long-term growth capacity.

In this context, slowing GDP, rising debt, tariff pass-throughs, and household strain are not isolated policy failures. They are the logical endgame of an entrenched framework in which spending is reflexive, cost is displaced, and growth is increasingly measured by activity sustained rather than value created.

What emerges is an unsustainable equilibrium: centralization replaces discipline, coercive redistribution substitutes for price signals, and policy-induced malinvestment is perpetuated in the name of stability — until the system ultimately fails on the very contradictions it suppresses.

Crisis, under such conditions, is not a shock — it is the system’s resolution.

____

Selected References

Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025

Prudent Investor Newsletters, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 07, 2025

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 202

Prudent Investor Newsletters, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t, Substack, November 16, 2025

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

noreply@blogger.com (Unknown) — Sun, 01 Feb 2026 12:26:00 +0000

The reality is, if we tell the truth, we only have to tell the truth once. If you lie, you have to keep lying forever—Rabbi Wayne Dosick

In this issue

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

I. GDP Shock, the PSEi 30 Barely Blinks

II. Liquidity-Led Asian Bull Run—The Philippines Tags Along

III. What the PSEi 30 Shows—and What It Conceals

IV. The Five-Minute Market: January 30

V. Index Output vs. Concentrated Reality

VI. ICTSI: The PSEi 30’s Silent Underwriter

VII. Concentration Risk Is Not Easing—It’s Shifting

VIII. Liquidity Concentration Remains Entrenched

IX. Manufactured Gains, Accumulating Fragility

XI. Mining–Oil Resurrection: Performance at the Margins, Volume Tells the Real Story

X. Expect a Pullback from the Overbought Mining-Oil Index

XI. When GDP Breaks, the PSEi 30 Follows

XII. Easy Money Fails—Again and Again!

XIII. The Pro-Cyclical Politics of Market Participation; Lessons from the 1994 GSIS–SSS Stock Loan Programs

XIV. PERA: Risk Transferred, Not Eliminated; When Loss Absorption Becomes a Policy Fault Line

XV. Philippine Peso Stress Is the Signal, Not the Noise

XVI. Trump’s Weak Dollar Policy: A Temporary Reprieve—Not a Resolution

XVII. From Gaming the Index to Gaming the Curve

XVIII. Macro Stability as Policy Objectives of Yield Curve Interventions

XIX. The PSEi 30 as Collateral Infrastructure

XX. Conclusion: January’s PSEi 30’s Performance: Not A Vote Of Confidence—But A Managed Outcome

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

Why Philippine equities rose as GDP, the peso, and credibility deteriorates

I. GDP Shock, the PSEi 30 Barely Blinks

Figure 1

In a week when Philippine authorities announced yet another growth shock—GDP slowing further from a revised 3.9% in Q3 to just 3.0% in Q4 2025—the domestic headline equity index closed the week down a negligible 0.07%. (Figure 1, upper table)

For full-year 2025, GDP growth decelerated sharply to 4.4%, from 5.7% in 2024—a material slowdown that we will examine in detail in a separate post.

Yet markets barely reacted.

Despite deteriorating macro fundamentals, January’s performance pushed the PSEi 30 up 4.56% month-on-month (MoM) and 7.96% year-on-year (YoY), its strongest combined MoM and YoY showing since September 2024.

On the surface, the Philippine equity market appeared resilient—almost indifferent—to worsening growth data.

II. Liquidity-Led Asian Bull Run—The Philippines Tags Along

This performance placed the PSEi 30 alongside most easy-money-driven Asian equity markets, many of which extended their 2025 bull runs into the first month of 2026.

According to Bloomberg data, 16 of 19 major Asian indices ended January higher, with an average gain of 4.7%. South Korea’s tech-heavy KOSPI led the surge, climbing nearly 24% in January and touching successive record levels. Other markets—including Singapore, Taiwan, Indonesia, Pakistan, and Sri Lanka—also carved out new highs. (Figure 1, lower graph)

In this context, Philippine equities benefited from the regional liquidity tide. But the PSEi 30’s gains tell only part of the story.

III. What the PSEi 30 Shows—and What It Conceals

Media commentary has largely attributed January’s index strength to optimistic domestic narratives, while blaming external forces and corruption for lingering weaknesses (self-attribution bias).

What has been almost entirely ignored is how index construction, free-float weighting, and trading mechanics materially shape reported performance.

The public remains largely uninformed about how a small cluster of heavyweight constituents—rather than broad-based participation—drives index outcomes.

January 30 offers a textbook example.

IV. The Five-Minute Market: January 30

Figure 2

On January 30, the PSEi 30 jumped 1.7% in a single session. But roughly 87% of that gain occurred during the five-minute pre-closing (floating) period, not during continuous trading! (Figure 2, topmost window)

Banks—particularly BPI—were central to this move.

BPI was down 0.27% heading into the pre-closing phase. During the runoff, however, the stock reopened nearly 9.73% higher—effectively a 10% spike!! (Figure 2, middle image)

This unusually large end-of-session repricing almost single-handedly altered the index outcome.

Other major beneficiaries:

BDO (+1.96%)
Metrobank (+2.82%)
SM Investments (+0.96%)
Ayala Land (+1.43%)

All were among the top 10 stocks by free-float market capitalization.

In a wink of an eye, January’s "outstanding" index performance was successfully locked in.

V. Index Output vs. Concentrated Reality

This divergence becomes clearer when decomposing returns.

The average month-on-month return of PSEi 30 component stocks was only 2.86%, and 2.85% on a full market-cap basis—well below the index’s 4.56% headline gain. (Figure 2, lowest diagram)

Why the gap?

Because the most significant contributions came from free-float-weighted gains concentrated in a handful of names—led principally by ICTSI, and reinforced by BPI, Ayala Corp, Metrobank, and Meralco. As of January 29, these five stocks accounted for 39.7% of the index’s free-float market capitalization.

VI. ICTSI: The PSEi 30’s Silent Underwriter

Figure 3

The PSE’s largest constituent, ICTSI, has been racing toward successive record highs throughout January. This performance is magnified by its free-float weight of 17.82%, an all-time high as of January 29th. (Figure 3, topmost pane)

In practical terms, ICTSI has bankrolled the PSEi 30’s returns since 2024.

With approximately 55% of the Services sector’s full market capitalization, ICTSI has been primarily responsible for the sector’s 8.7% MoM and 33% YoY gains.

Sectoral strength, in this case, is less a reflection of broad economic vitality than of single-firm dominance amplified by index mechanics.

VII. Concentration Risk Is Not Easing—It’s Shifting

Interestingly, despite ICTSI’s outsized role, the combined weight of the top five index constituents appears to have peaked. After reaching a record 53.02% in mid-December, their share eased slightly to 51.64% by January 29th. (Figure 3, middle chart)

This can be read in two ways:

One. A welcome broadening of gains beyond the largest names, or

Two. A growing vulnerability stemming from the index’s continued dependence on a narrow elite—increasingly dependent on tactical flows rather than structural diversification.

At this stage, trading behavior suggests the latter interpretation is more consistent with reality.

VIII. Liquidity Concentration Remains Entrenched

January trading data reinforces this conclusion.

The top 10 brokers accounted for an average of 61.5% of daily main board volume, down marginally from 63.5% in December. (Figure 3, lowest visual)

On a weekly basis, however, this concentration trend has been rising steadily since the second half of 2025.

Meanwhile, the top 10 traded issues represented 58.8% of daily volume, down from 65% in December.

These are modest improvements—but they do not alter the core reality: trading activity remains heavily concentrated among a small group of players and stocks, who, in turn, shape index outcomes.

IX. Manufactured Gains, Accumulating Fragility

Taken together, January’s performance was not the product of broad-based confidence or improving fundamentals. It was manufactured through index construction, free-float concentration, and strategically timed flows—particularly during thin post lunch trading, pre-closing and runoff windows.

While the gains appear orderly on the surface, the risk concentration embedded within the PSEi 30 is reticently intensifying. This fragility is neither well understood nor adequately discussed—yet it defines the true state of the market far more than the headline index level ever could.

X. Breadth Confirms Concentration, Not Strength

There is more evidence that January’s headline gains masked a deeply concentrated market.

Figure 4

Despite the PSEi’s strong January performance, market breadth barely improved.

The advance–decline spread widened by only 30 issues, a stark contrast to 2023’s spread of 184, when the PSEi posted a more modest 3.45% YoY gain—yet still ended that year down 1.77%. (Figure 4 topmost window)

In other words, stronger index performance today is being achieved with far weaker participation.

XI. Mining–Oil Resurrection: Performance at the Margins, Volume Tells the Real Story

A significant contributor to January’s gains came from the Mining and Oil sector, riding the surge in global metal prices.

The sector’s 10-component index jumped 25.8% MoM and an extraordinary 175% YoY, off a deeply depressed base. Unlike 2006–2012, miners are not just outperforming but decisively diverging from the PSEi 30. (Figure 4, middle image)

Volume followed performance. Mining turnover surpassed that of the once-favored (PLUS and BLOOM) gaming stocks—higher by 18% in January. Yet, PLUS fell 19.01% MoM, BLOOM rose 12.6%, and Philweb surged 56.3%—a clear signal of institutional preference for high-volatility, high-beta trades. (Figure 4, lowest diagram)

This divergence highlights an uncomfortable reality: capital is rotating not toward fundamentals, but toward popular narratives, leverage and momentum.

The Mining sector’s share of main board volume surged to 7% in January, contributing materially to the 33.6% YoY increase in the PSE’s main board volume and the 36.5% rise in total/gross market turnover. Cross transactions accounted for 17.3% of MBV.

Meanwhile, the Property sector’s share of gross turnover rose to 21.7% from 18.74%, while Holdings increased to 15.26% from 14.21%. Property had negative returns (-3.43% MoM, -.26 YoY) while holdings were buoyed (+4.86 MoM, +2.25% YoY)

Together, these shifts reinforce a widening divergence between mainstream index performance and the previously shunned, cyclical, or politically unpopular sectors, particularly mining and oil.

We have long anticipated the sector’s revival, and recent performance has clearly validated our call.

But wait…

X. Expect a Pullback from the Overbought Mining-Oil Index

Though we expect the mining index to endure a sizeable pullback from their overextended, overbought levels—no trend moves in a straight line—this does not negate the broader regime backdrop supporting the sector.

A growing set of global structural risks consistent with a potential regime transformation—manifested in a deepening war economy, the weaponization of the dollar, sanctions, protectionism, fiscal dominance, persistent central bank easing, and widening geopolitical tensions—should place a cap on any sustained decline.

In this context, we should also expect partial rotation within the complex, particularly from metals toward oil-gas, rather than a wholesale reversal of the trade.

XI. When GDP Breaks, the PSEi 30 Follows

Despite the apparent regularity of post–lunch recess rallies—what I have previously labeled "afternoon delight"—and the repeated appearance of coordinated large-cap based "pre-closing" pumps (and dumps), the PSEi 30 has historically tracked GDP trends, albeit with a lag.

Figure 5

The most recent upside cycle began in mid-November 2025 and appears to have peaked by mid-January 2026. Notably, the index remained conspicuously indifferent to the Q4 GDP collapse, as if the slowdown had already been discounted—or managed. (Figure 5, topmost window)

History suggests otherwise.

At the onset of BSP rate cuts in August 2024, the PSEi surged nearly 15%, as easing was sold as a growth elixir. That optimism proved short-lived. (Figure 5, middle graph)

GDP slowed sharply from 6.5% in Q2 2024 to 5.2% in Q3, barely stabilized in Q4, and was followed by a 10.5% PSEi plunge in Q1 2025.

By Q3 2025, GDP had deteriorated further to 3.9%, and the PSEi collapsed another 18%.

This pattern is not accidental.

XII. Easy Money Fails—Again and Again!

It bears repeating: RRR cuts, policy rate easing, expanded deposit insurance, and persistent fiscal stimulus—including pandemic-era deficits—have NOT revived growth. (Figure 5, lowest chart)

As history has shown, they have accompanied or worsened economic deceleration.

Yet the mainstream narrative insists these tools are the only solution.

Figure 6

The same logic is now being applied to equities: more liquidity, more intervention, more management of outcomes. (Figure 6, topmost diagram)

Ironically, rather than igniting a genuine bull market, the PSEi increasingly requires non-market interventions to manufacture the appearance of macro stability.

XIII. The Pro-Cyclical Politics of Market Participation; Lessons from the 1994 GSIS–SSS Stock Loan Programs

Aside from direct market interventions, the politics of engineering a bull market have evolved.

Beyond the Capital Markets Efficiency Promotion Act (CMEPA)—which we have repeatedly criticized—the mainstream has revived proposals reminiscent of the defunct GSIS–SSS stock loan programs to further stimulate retail participation.

These initiatives, however, reflect fundamentally pro-cyclical policymaking.

The GSIS and SSS stock loan programs—most notably the GSIS Stock Purchase Financing Program (SPFP) launched in 1994—coincided with the peak of the PHISIX (now the PSEi).

The 1997 Asian Financial Crisis inflicted severe losses, exposing the program’s structural flaw: embedding leverage and mark-to-market risk into institutions designed for capital preservation.

The crisis did not create this fragility; it merely revealed the contradiction.

XIV. PERA: Risk Transferred, Not Eliminated; When Loss Absorption Becomes a Policy Fault Line

Current discussions on deepening participation now extend to PERA (Personal Equity and Retirement Account), where savings are managed by accredited administrators and invested in qualified instruments such as mutual funds, UITFs, insurance products, and government securities.

While PERA removes explicit leverage, it introduces principal–agent problems and asymmetric information risks, with outcomes largely driven by professional managers rather than individual contributors—with fee structures, asset allocation, career advancement and herding behavior playing a decisive role in their decision process.

Losses being absorbed at the individual level is systemically healthy. But the moment the state attempts to cushion or prevent those losses, it recreates the SPFP problem—only more slowly and diffusely.

In short, policies framed as "enhancing participation" amplify bubble cycles and effect a tacit redistribution from savers to institutional intermediaries, ultimately eroding—rather than strengthening—the foundations of the capital market.

XV. Philippine Peso Stress Is the Signal, Not the Noise

The accelerating GDP slowdown validates our long-held view that the USDPHP breach of the 59 “soft peg” was a signal of mounting structural stress. (Figure 6, middle image)

It also casts the BSP’s gold sales in a different light—not merely as FX defense, but as an indication of latent stress across government, central bank, and bank balance sheets.

As we wrote last November:

The peso’s breach of 59 isn’t just a technical move. It’s the culmination of structural stress that monetary theater can no longer hide.

XVI. Trump’s Weak Dollar Policy: A Temporary Reprieve—Not a Resolution

The peso’s recent recovery owes less to domestic strength than to global easing dynamics. US dollar weakness—driven by policy stance and market expectations under President Donald Trump—pushed the DXY down roughly 0.8% MoM and 9.8% YoY.

As a result, USDPHP ended January at 58.86, temporarily slipping below the 59 threshold (+0.85% YoY, +0.12% MoM).

This reprieve is unlikely to last. Once balance-sheet stress becomes more visible, a test of the 60-level appears increasingly inevitable.

XVII. From Gaming the Index to Gaming the Curve

At January’s close, the Philippine BVAL yield curve revealed yet another layer of policy response. (Figure 6, lowest chart)

Figure 7

The curve reflects a deliberate, policy-induced bearish steepening. As Q4 GDP slowed to 3%, the BSP eased the front end and belly to support bank funding conditions and preserve financial stability. Simultaneously, 20–25 year yields rose month-on-month, exceeding November 2025 levels, as markets imposed a fiscal and inflation credibility premium amid global term-premium repricing. (Figure 7 topmost image)

The contradiction is stark: domestic accommodation is deployed to stabilize balance sheets, while long-duration yields signal rising skepticism over fiscal sustainability and inflation containment.

XVIII. Macro Stability as Policy Objectives of Yield Curve Interventions

This curve management feeds directly into the gaming of the PSEi 30.

Historically, widening 10Y–3M and 10Y–6M spreads have coincided with CPI pressure, as accommodation persists and inflation risk migrates through FX and expectations channels. (Figure 7 middle chart)

Meanwhile, the PSE’s Financial Index has risen across both steepening (2020–22) and flattening (2023) regimes—not because of curve “health,” but because of curve control. (Figure 7, lowest graph)

Through coordinated yield-curve signaling, peso stabilization, and institutional balance-sheet absorption, authorities project macro stability despite slowing growth—redistributing stress away from markets and toward households, future inflation, and shrinking policy space.

XIX. The PSEi 30 as Collateral Infrastructure

Beyond boosting expectations and managing optics, the theatrics surrounding the PSEi 30 serve a more practical and underappreciated function: inflating and stabilizing collateral values across the financial system.

For banks, insurers, trust entities, and large institutions, equity holdings—particularly index-heavy, highly liquid names—are not merely investments. They function as collateral, balance-sheet buffers, and capital-supporting assets used in repo transactions, interbank funding, structured products, and internal risk models.

In an environment of slowing GDP, rising long-end yields, and latent balance-sheet stress, mark-to-market declines in these assets would immediately tighten financial conditions. Holding the PSEi 30 together—especially its largest constituents—helps preserve collateral valuations precisely when funding pressures are building elsewhere.

This helps explain why support is selective rather than broad-based. Propping up the largest free-float names delivers the greatest collateral impact per peso deployed, even as market breadth deteriorates. The objective is not market health, but balance-sheet continuity.

In this light, the PSEi 30 becomes less a reflection of economic confidence and more a policy-adjacent tool—a stabilizing surface that allows banks and institutions to extend accommodation, delay recognition of stress, and avoid procyclical tightening in credit and funding markets.

But this stability is conditional. Should equity collateral values falter, or when cash flow/liquidity problems intensify, the feedback loop would reverse—forcing deleveraging, tightening credit, and accelerating the very slowdown policymakers are trying to defer.

XX. Conclusion: January’s PSEi 30’s Performance: Not A Vote Of Confidence—But A Managed Outcome

Index gains were manufactured through concentration, liquidity choreography, curve control, peso management, and the tacit inflation of collateral values.

What appears as market resilience is, in reality, the financial system preserving its own scaffolding amid deteriorating growth—a classic symptom of a late-cycle phase rather than a genuine expansion.

In such phases, markets are stabilized not to signal strength, but to delay adjustment. Stress is redistributed away from asset prices and toward households, future inflation, fiscal credibility, and shrinking policy space.

The longer stability is engineered rather than earned, the more abrupt the eventual repricing becomes—when collateral support weakens and policy capacity is finally exhausted.

___

Select References (quote and validations)

Prudent Investor Newsletter, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025

Prudent Investor Newsletter, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

noreply@blogger.com (Unknown) — Sun, 18 Jan 2026 06:22:00 +0000

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude. In the Press and Encyclopaedias, in Schools and Universities, everywhere Error holds sway, feeling happy and comfortable in the knowledge of having Majority on its side― John Wolfgang Goethe

In this issue

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle

Conclusion: Accommodation as Policy, Crisis as Outcome

Accommodation Is the Policy: Rising Philippine Bank Strains Under the BSP’s Easing Cycle

Inflation optics, soft-peg constraints, and the mounting cost of balance-sheet preservation.

Section I — Universal-Commercial Bank Credit Is Stalling Despite BSP’s Aggressive Easing

Interest rate cuts have become the by-phrase of the local financial community.

Authorities continue to signal sustained monetary loosening as economic stimulus, while establishment economists and legacy media have rationalized financial easing—and the resulting rally in the PSEi 30—as a necessary catalyst for market recovery. Ironically, the same narrative also attributes the peso’s record weakness to this easing cycle.

Either the mainstream genuinely believes that peso depreciation and economic recovery naturally go hand in hand, or market relationships are being selectively blurred or fudged to justify coordinated equity-market pumps.

Recent BSP releases—including the Universal and Commercial (UC) Bank’s November Loans Outstanding, the November Depository Corporations Survey, the November Philippine Bank’s Balance Sheet and Selected Performance Indicators, and the December central bank survey (MAS) indicators—tell a more troubling story beneath the liquidity narrative.

Since late 2024, the BSP has pursued an extended easing cycle combining aggressive reserve-requirement reductions and repeated policy rate cuts, alongside financial backstops such as the doubling of deposit insurance coverage.

Reserve requirements for UC banks were slashed from 9.5% to 7.0% in late 2024, and further to 5.0% by March 2025, amounting to a 450-basis-point liquidity release. Over the same period, successive rate cuts brought the policy rate down to 4.5% by December 2025.

This accommodative stance unfolded against the backdrop of lingering pandemic-era fiscal deficits, whose credibility was further strained by the flood-control corruption controversy that erupted in Q3 2025.

Yet despite persistent easing signals, private credit growth failed to re-accelerate.

Figure 1

Universal bank lending peaked in January 2025 and slowed again by November, with both production loans and consumer credit losing momentum. (Figure 1, topmost window)

UC banks reported a marked deceleration in November 2025, with total loan growth at around 10.7%, the slowest pace since late 2024. This was driven by weakening production loan growth (about 9.0%), while consumer credit, though still elevated in nominal terms, cooled to roughly 23%, its slowest expansion since late 2023. (Figure 1, middle image)

This slowdown is striking given the macro backdrop: post-4% Q3 GDP growth, moderating inflation, and near-full employment—conditions that should, in theory, have reinforced credit demand.

Instead, while lending momentum faded, monetary liquidity continued to expand. M1 growth (cash in circulation and transferable deposits) remained positive at just over 7% in November, extending its uptrend even as credit creation slowed. (Figure 1, lowest graph)

Figure 2

At the same time, deposit liabilities grew by only about 7.3%, continuing to underperform loan growth and reinforcing the underlying imbalance. (Figure 2, topmost visual)

Taken together—slowing production and consumer loans, lagging deposit growth, and rising transactional liquidity—the evidence suggests that monetary easing is no longer transmitting into productive credit formation.

Rather than catalyzing real investment, it appears to be inflating balance sheets and leverage, heightening systemic fragility without delivering commensurate real-economy gains.

That is not all.

Section II—Banks Are Reallocating, Liquidity Is Recycling, Not Financing Growth

In the BSP’s December central bank survey, currency issuance not only surged to a record Php 3.2 trillion, but its year-on-year YoY growth accelerated to about 17–18%, surpassing the 2018 spike and ranking as the third-highest on record, behind only 2008 and 2020. (Figure 2 middle image)

Notably, 2018 coincided with the BSP’s baptismal phase of its reserve-requirement (RRR) easing cycle, while 2008 (Great Financial Crisis) and 2020 (Pandemic recession) were both periods marked by domestic economic stress and volatility spikes of the USDPHP.

History may not repeat—but does it rhyme?

This liquidity surge, which should be further reflected in the December Depository Corporations Survey, likely contributed to the January-effect euphoria in the PSE, reinforcing asset (equity) price inflation even as credit growth slowed.

Crucially, this marginal liquidity growth is not coming from private lending.

Instead, net claims on the central government (NCoCG) held by banks surged to a record Php 5.89 trillion, up roughly 11% year-on-year, the fastest pace since mid-2024.

At the same time, the BSP’s own NCoCG rebounded to around Php 760 billion—its highest nominal level since March 2025, largely due to a sharp decline in liabilities to the national government—despite falling nearly 20% YoY. (Figure 2, lowest chart)

This decline most plausibly reflects a drawdown of government deposits at the BSP or reduced sterilization vis-à-vis the Treasury, mechanically releasing base money into the financial system. While debt repayment is a theoretical alternative, the persistence of record public debt levels as of November (Php 17.562 trillion) makes that explanation unlikely.

Despite falling Treasury yields—which have reduced banks’ mark-to-market losses and should have eased balance-sheet pressures—banks continued to accumulate sovereign exposure.

Figure 3

Held-to-Maturity (HTM) securities climbed to a record Php 4.08 trillion in November, underscoring a significant reallocation into government paper. HTMs now account for roughly 70% of banks’ net claims on the central government. (Figure 3, topmost window)

Banks have also escalated on investments. After a brief pullback in September from unprecedented highs, Available-for-Sale (AFS) securities rebounded by over 7% to Php 3.30 trillion, approaching HTM levels and reinforcing the portfolio shift away from private credit. (Figure 3, middle diagram)

Yet despite record nominal credit, aggressive securities accumulation, and abundant liquidity, bank liquidity metrics continue to deteriorate. (Figure 3, lowest graph)

Liquid assets-to-deposits fell to about 47%, near pre-easing and pandemic-era lows, effectively erasing the BSP’s 2020-21 emergency liquidity buffers.
Cash-to-deposits dropped to roughly 9.7% in November, the second-lowest level on record.

Figure 4

While banks have reduced bills payable, bond payables continued to rise, lifting total borrowings to around Php 1.5 trillion, down from the Php 1.906 trillion March 2025 peak but still elevated. (Figure 4, topmost window)

Liquidity management has increasingly shifted inward: interbank lending surged to a record Php 502 billion, alongside repo transactions exceeding Php 100 billion, signaling intensive liquidity recycling within the banking system. (Figure 4, middle image)

Taken together, these figures point to a clear pattern.

Banks are reallocating balance sheets toward sovereign absorption, liquidity management, and interbank cushioning—not expanding productive credit. The BSP, in turn, appears less to be steering outcomes than accommodating them, validating financial system preferences rather than redirecting capital toward growth.

Section III — BSP Is Accommodating Outcomes, Not Steering the Cycle

The BSP’s recent policy trajectory reveals a central bank anchored less to credit conditions or balance-sheet health than to inflation optics and system accommodation.

Reserve-requirement cuts and successive policy-rate reductions have consistently followed periods of CPI deceleration, even amid deteriorating bank liquidity metrics, balance sheets increasingly tilted toward sovereign absorption, and liquidity being recycled within the financial system rather than funding productive expansion. (Figure 4, lowest chart)

Monetary easing, in this context, has been CPI-conditioned rather than cycle-stabilizing.

CPI, therefore, becomes highly politicized and susceptible to the policy agendas of political leadership.

Why this persistence?

While the BSP’s inflation-targeting framework does not explicitly target asset prices, it cannot ignore collateral values in a bank-dominated financial system.

Falling collateral values threaten capital adequacy, impair credit transmission, and raise systemic stress. Policy calibration therefore prioritizes preventing balance-sheet rupture, even when that means sustaining distortions and postponing adjustment.

Figure 5

This implicit bias toward continuity has encouraged banks to manage imbalances rather than resolve them—through accounting optics, ratio management, and asset reclassification.

Non-performing and related risks (e.g. loan loss provision) are contained not by deleveraging, but by supporting numerator growth (total loan portfolio—TLP—or bank credit growth) relative to denominators, a classic Wile E. Coyote velocity dynamic: balance sheets continue running forward, suspended by liquidity and policy accommodation, even as underlying fundamentals weaken. (Figure 5, top and middle panes)

The same dynamic appears on the BSP’s external balance sheet. While net foreign assets (NFA) remain elevated, their support increasingly comes from valuation and financing effects rather than organic FX inflows.

Rising global gold prices mechanically lift reserve valuations without expanding usable foreign-exchange buffers. (Figure 5, lowest graph)
National government external borrowing routed through the BSP temporarily bolsters NFA, but these gains are liability-mirrored, not earned.
Bank borrowings similarly augment liquidity while obscuring underlying fragility.

Figure 6

More revealing than the level of NFA is its slowing rate of accumulation, which coincides with persistent USDPHP pressure. (Figure 6, topmost visual)

This deceleration signals that the BSP’s capacity to manage the exchange rate is increasingly constrained by the very accommodations it sustains.

Peso dynamics, therefore, are not incidental. Under the BSP’s soft-peg regime, exchange-rate management remains a direct but tacit policy objective, subordinated to liquidity preservation, fiscal dominance, and bailout imperatives. (Figure 6, lowest chart)

Rather than defending a fixed level, the BSP has been compelled to tolerate managed depreciation, balancing currency weakness against the need to sustain domestic liquidity and support a political economy defined by a widening savings-investment gap.

USDPHP hit a record 59.46 last week amid declining volume and suppressed volatility, highlighting trade constraints and the footprint of BSP intervention.

This trade-off is most visible in energy and utility pricing—not through import dependence, but through bailout architecture. Producer subsidies, RPT reliefs, administered pricing, and government-nudged implicit M&A arrangements suppress inflation pass-through while deepening balance-sheet entanglement between the state, the financial system, and regulated corporates.

CPI relief is achieved, but only by displacing risk elsewhere in the system.

In this sense, the regime exemplifies Goodhart’s Law: by targeting CPI, other signals—credit quality, liquidity resilience, capital discipline—are progressively distorted.
It also reflects a Heisenberg Uncertainty-style policy problem: intervention alters the system it seeks to stabilize, most visibly in leverage-dependent sectors and currency dynamics.

Sustained FX intervention further amplifies this fragility, increasing the risk that adjustment, when it arrives, will be sharper and more volatile.

Viewed together, the pattern is consistent. The BSP is not directing capital toward productive expansion nor pre-empting cyclical deterioration. It is validating outcomes shaped by asset inflation, fiscal dominance, bailout logic, and inflation optics, accommodating systemic constraints in ways that systematically favor incumbents.

The public is offered stability in appearance, while adjustment is deferred—quietly, repeatedly, and at growing long-term cost.

Conclusion: Accommodation as Policy, Crisis as Outcome

The evidence presented does not describe policy error in the conventional sense. It reflects the unintended consequences of an institutional regime constraint operating within a political-economic framework that systematically privileges incumbent interests.

The BSP and the bank-dominated financial system operate under conditions where inflation optics, fiscal dominance, bailout dependencies, and soft-peg maintenance sharply limit genuine counter-cyclical control. Within this structure, discretion is less about steering the cycle than accommodating existing balance-sheet vulnerabilities.

What is sold as stimulus is largely balance-sheet preservation; what is promoted as stability is increasingly liquidity- and valuation-driven; and what appears as growth is often internal transactional recycling rather than productive expansion.

In such a regime, monetary policy does not fail abruptly — it erodes gradually, until markets, balance sheets, or external constraints force destabilizing adjustments.

The risk is not that the peso weakens, or that interest rates are “too low,” but that accumulated distortions increase the likelihood that eventual correction becomes more volatile, less controllable, and more socially costly.

This is not an argument about intent or competence. It is an argument about incentives, institutional constraints, and the limits of accommodation once gravity reasserts itself.

Where political-ideological rigidity suppresses reform, crisis ceases to be an accident and becomes the logical endgame.

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease

noreply@blogger.com (Unknown) — Sun, 11 Jan 2026 11:16:00 +0000

With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people. There is less ground than ever for hoping that, so long as the people have no choice but to use the money their government provides, governments will become more trustworthy—Friedrich August von Hayek

In this issue

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance

II. The USDPHP’s Suppressed Volatility

III. Media Agitprop and Be Careful of What You Wish For

IV. Lindy Effect: USDPHP’s 56-year Uptrend

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence

VI. Inflation: Same Story, Different Mask

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics

VIII. Employment Optics vs Labor Reality

IX. Deficits, Debt, and the Entropic Drift

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease

2026 Opens with USDPHP at Record Highs: The Peso Is the Symptom, Policy Is the Disease

Gold-inflated FX reserves, suppressed USDPHP volatility, and the slow collapse of the BSP’s soft peg—symptoms of a deeper political problem.

Nota Bene:

For new readers, this post extends our earlier analysis and projections on USDPHP; please see the reference sections for our previous works.

I. 2026: The Peso at Record Lows, BSP’s Contradictory Stance

2026 opened with USDPHP printing its fourth record high, touching 59.355 on January 7, placing the peso at an all-time low. This comes after the pair decisively breached the 59 level in October 2025—a threshold that, in practice, had functioned as a de facto boundary since late 2022, or roughly three years.

Almost immediately, the Bangko Sentral ng Pilipinas (BSP) went public, stating it would not defend the peso, despite what it described as “tremendous pressure” to do so.

This posture echoed its statement following the October breakout, where the BSP asserted that it merely “allows” market forces to determine the exchange rate.

As we noted in a November 2025 post, such phrasing implicitly presupposes central bank supremacy over the market, implying that exchange-rate movements occur only at the BSP’s discretion—an assertion belied by the data.

II. The USDPHP’s Suppressed Volatility

Figure 1

Absent official confirmation, one is reminded of Bismarck’s dictum: never believe anything in politics until it has been officially denied. Circumstantial evidence points strongly to prior intervention. In the seven instances when USDPHP approached or touched 59 before October 2025, both trading volume and realized volatility consistently compressed—a pattern difficult to reconcile with a freely clearing market. (Figure 1, topmost and middle panes)

The same pattern has persisted after the breakout.

While the BSP has ostensibly “allowed” USDPHP to violate its three-year boundary, average daily trading volume has trended downward since mid-2025, and by early January 2026 had fallen back to levels last seen in late 2024. Combined with a persistently narrow intraday trading range, this has produced a marked decline in day-to-day price changes. Put bluntly, suppressed volume has translated into suppressed volatility—a classic signature of administrative smoothing.

III. Media Agitprop and Be Careful of What You Wish For

Predictably, much of the self-righteous media attributed the peso’s latest record low to a “strong” US dollar. Yet the DXY remains broadly range-bound near its 2022 levels, despite a modest rebound from its mid-2025 trough. (Figure 1, lowest chart)

The divergence is telling: USDPHP has been rising steadily since May 2025, even as the broad dollar index failed to make new highs.

Yes, the dollar strengthened this week, appreciating against seven of ten Asian currencies tracked by Bloomberg, and USDPHP—up roughly 0.7% on the week—was among the largest movers. But context matters.

Be careful what the establishment wishes for. Such agitprop risks becoming self-fulfilling.

The US dollar may indeed be attempting a cyclical rebound. Should that occur, it would likely coincide with a tightening of global financial conditions, making dollar funding scarcer and more expensive.

A stronger DXY would not cause domestic weakness—but it would expose internal fragilities that have been obscured by global easing.

This pattern is consistent with Minsky’s financial instability hypothesis. Repeated suppression of exchange-rate volatility creates the illusion of stability, encouraging leverage, fiscal expansion, and balance-sheet risk. The eventual adjustment does not arrive as a shock—but as accumulated fragility ventilated through the peso.

Figure 2

As we argued last November, USDPHP spikes rarely occur in a vacuum. Historically, they coincide with periods of economic stress. Using BSP end-of-quarter data: (Figure 2)

1983 debt crisis: +121% over 12 quarters (Q1 1982–Q1 1985)
1997 Asian Financial Crisis: +66.2% over 6 quarters (Q1 1997–Q3 1998)
Dot-com bust (1999–2004): +30.6% over 20 quarters (Q2 1999–Q1 2004)
Global Financial Crisis: +17.0% over 5 quarters (Q4 2007–Q1 2009)
Pandemic recession: +22.6% over 7 quarters (Q4 2020–Q3 2022)

The current breakout, now coinciding with weakening growth momentum, fits this historical pattern uncomfortably well.

IV. Lindy Effect: USDPHP’s 56-year Uptrend

More importantly, the breach of the 59 level reinforces the USDPHP’s roughly 56-year secular uptrend. This can be viewed through Nassim Taleb’s Lindy Effect: not as a property of the exchange rate itself, but of the political-economic ideological regime that governs it. The longer a depreciation bias survives—across crises, cycles, and administrations—the more robust and persistent it proves to be.

This trend is therefore measured not merely by age, but by repeated survival—by the durability of the policies, incentives, and fiscal behaviors that continually reproduce it.

V. Gold’s Rising Role in the GIR: Serendipity Saved Incompetence

This context is essential when evaluating the BSP’s reported December 2025 Gross International Reserves (GIR) of $110.872 billion.

Figure 3

All-time-high gold prices played a decisive role in both the monthly and annual GIR outcome. Remarkably, the valuation gain on gold alone accounted for more than 100% of the roughly $4.6 billion year-on-year increase, while declines in foreign exchange investments exerted a drag on the headline figure.(Figure 3)

Figure 4

As a result, gold now represents its highest share of GIR in over a decade. This is especially striking given that the BSP was the largest net seller of gold in 2024, a move justified at the time as opportunistic monetization of high prices—and, more pointedly, on the argument that gold was a “dead asset.” (Figure 4, topmost and bottom graphs)

Ironically, the BSP has since been incrementally rebuilding its gold position at higher prices than those at which it sold.

As in 2020, gold once again served as a leading indicator. Then, large-scale gold sales—alongside increased national government’s external borrowing—were used to finance peso defense under a quasi-soft-peg regime. Once the proceeds were exhausted, borrowing constraints tightened, and usable FX reserves were drawn down, markets ultimately forced an adjustment: a weaker peso. (Figure 4, middle image)

Briefly, BSP gold sales foreshadowed the 2020 USDPHP spike—and a rerun appears to be unfolding.

Gold, however, is not equivalent to FX. It is less liquid in crisis: politically sensitive to mobilize, slower to swap into dollars, and volatile in mark-to-market terms. Markets understand this distinction—even if headline GIR figures do not.

Viewed counterfactually, had gold prices fallen in 2025, GIR would have declined materially, reserve-adequacy ratios would look materially worse, and narrative control would have been far more difficult. None of the reported strength reflects improved external competitiveness, durable capital inflows, or enhanced peso credibility.

Gold did not validate policy. It rescued the optics.

In that sense, the 2025 reserve story reveals something uncomfortable to the mainstream but unmistakable: serendipity saved incompetence.

VI. Inflation: Same Story, Different Mask

The government’s inflation narrative should feel familiar by now.

Last week, sections of the mainstream media began warning—belatedly—about the impact of peso depreciation on electricity prices. This is hardly new.

The Philippines’ recent inflation history has unfolded in distinct waves, each closely intertwined with the USDPHP.

Figure 5

During 2013–2018, the steady rise in USDPHP coincided with the first wave of inflationary upswing, which began building from 2015. The second wave in USDPHP (2021–2022) overlapped with the second inflation shock spanning 2019–2022, driven by global central bank easing, supply disruptions, energy prices, and domestic pass-through effects. (Figure 5, topmost image)

What distinguishes the two episodes is not the inflation spike—but the disinflation phase that followed.

From September 2018 to June 2021, USDPHP declined by roughly 11%, while CPI fell sharply from 6.7% to just 0.8%. As discussed previously, this period coincided with the BSP’s increasing reliance on Other Reserve Assets (ORA)—including derivatives, repos, and short-term FX borrowing—to manage the exchange-rate regime, a shift clearly visible in the GIR composition.

In the current episode, the adjustment mechanism has been fundamentally different.

Since first testing the 59 level in 2022, USDPHP has remained range-bound between 55 and 59, with no sustained appreciation. Yet headline CPI retraced materially—not because of currency relief or market forces, but due to a combination of:

Demand destruction, now evident in slowing GDP growth
Administrative price controls, including ₱20 rice programs and mandated MSRPs
Distortions arising from these interventions, masking underlying pressures
Composition and measurement effects, aligned with political incentives for easing—particularly amid ongoing bailouts of the energy sector, banks, and real estate

It was therefore no coincidence that a day before the October 2025 59-level breakout, the administration announced renewed price freezes, citing natural calamities as justification.

Despite these measures, December CPI rose to 1.8%, well above consensus expectations, lifting quarterly inflation from 1.4% in Q3 to 1.7% in Q4. Disinflation, it appears, has already begun to fray.

This erosion is further reflected in liquidity conditions. Bailouts in the energy sector coincided with an 8.26% year-on-year expansion in M3 in October, the fastest since September 2023. (Figure 5, middle diagram)

November data remain unpublished.

More broadly, the BSP has either delayed, discontinued, or reduced the frequency of several previously standard statistical releases—ranging from Bank’s MSME lending to stock market activities (transactions, index, and market capitalization) and more. Whether this reflects capacity constraints or political narrative sensitivity remains an open question. But opacity rarely improves credibility.

VII. Self-Poverty Ratings, Sentiment, and the Limits of Macro Optics

While headline CPI surprised to the upside, food inflation for the bottom 30% of households turned positive for the first time since March 2025—a critical inflection point historically associated with rising hunger and self-rated poverty. (Figure 5, lowest visual)

Figure 6

Consistent with this, the SWS Q4 survey showed self-rated poverty rising to 51% of households, with another 12% on the borderline—a combined 63%. (Figure 6, upper chart)

This deterioration in sentiment persists despite record consumer credit, near-full employment headlines, slowing CPI, pandemic-scale deficit spending, and still-positive GDP growth.

This is not an anomaly. Improvements in self-rated poverty reversed as early as 2017, spanning two administrations and coinciding with a sustained surge in deficit spending.

What is rarely discussed is that this reflects the redistributive and extraction effects of crowding out—the attenuation of the private sector in favor of the state and its preferred private sector intermediaries.

Households have responded predictably by leveraging their balance sheets to sustain consumption amid eroding purchasing power, refinancing debt rather than building resilience through savings.

This divergence between headline indicators and lived experience is a classic case of James Buchanan’s fiscal illusion. By diffusing costs through inflation, deficits, and administered prices, the state masks the true burden of adjustment—until it reappears in household balance sheets and public sentiment.

VIII. Employment Optics vs Labor Reality

The government reported improving employment data last November. Less visible is that labor force participation has been declining since late 2022, while employment momentum shows signs of plateauing (via rounding top formation). (Figure 6, lower graph)

More troubling is the quality of employment. Functional illiteracy remains widespread, MSMEs and informal work dominate job creation, and household income growth remains structurally dependent on OFW remittances.

This combination explains why sentiment remains depressed—and why slowing GDP risks morphing into a more pernicious mix of rising NPLs, renewed inflation pressures from deficit monetization, or outright stagflation.

IX. Deficits, Debt, and the Entropic Drift

Despite the rhetoric surrounding corruption and reform, the administration has signed a Php 6.793 trillion 2026 budget, ensuring that the entropic forces dragging on growth remain firmly in place.

Figure 7

Public debt rose to a record Php 17.65 trillion in November, up 9.7% year-on-year, defying the Bureau of the Treasury’s September projection of year-end declines. (Figure 7, middle and topmost images)

Domestic debt expanded by 10.95%, while foreign debt rose 7%, continuing its gradual upward share since 2021.(Figure 7, lowest diagram)

As we have repeatedly argued, expanding deficits mechanically imply rising debt and servicing burdens. Whether domestic or foreign, this accumulation heightens balance-sheet and duration risks.

No amount of propa-news or fiscal newspeak alters that arithmetic.

Eventually, these imbalances surface—in the exchange rate, inflation, interest rates, asset prices, and real activity. Not abruptly, but gradually, through a boiling-frog dynamic—a process that markets ventilate over time.

As Mancur Olson warned, mature systems accumulate distributional coalitions that extract rents while resisting adjustment. The result is slower growth, rising inequality, and a political preference for redistribution over reform—precisely the conditions now reflected in peso weakness and declining household sentiment.

X. PSE’s January 2026 Boom: Liquidity First, Fundamentals Later

Unsurprisingly, liquidity-driven rallies continue to propel global equity markets, with the effect especially visible in Asia. The Philippine PSEi 30 gained 3.47% week-on-week (WoW), ranking fourth in the region. As evidence of speculative mania, nine of nineteen Asian indices closed at or near all-time highs for the first time, delivering unusually strong market breadth.

Figure 8

Yet the Philippine rally remains highly concentrated, with a handful of brokers and heavily traded issues generating most of the volume. The largest-capitalization stock, ICTSI, surged 12.5% WoW, almost single-handedly driving the PSEi 30, flanked by Jollibee (+12.32%) and AEV (+11.35%). (Figure 8, topmost visual)

Weekly breadth within the PSEi 30 favored gainers (19 of 30), while the broader PSE recorded its best two-week breadth since January 2023—ironically, the PSEi 30 still closed 2023 down 1.77%. (Figure 8, middle window)

Although the number of issues traded daily spiked to 2022 highs—often read as a sign of rising retail participation—main-board turnover averaged just Php 6.25 billion per day, a curious outcome amid New Year euphoria. (Figure 8, lowest chart)

As with prior easing-driven rallies, such liquidity pumps tend to have short half-lives.

XI. Conclusion: Record USDPHP A Symptom, Policies The Disease

The November break of USDPHP 59 marked the unraveling of the BSP’s soft peg and exposed underlying economic fragility. December’s record highs made clear that this was not a transient overshoot, but the manifestation of deeper fault lines—fiscal bailouts, and mounting financial stress—expressed as widening bailouts initially at the energy sector

January 2026 merely confirms the trajectory. What appears as resilience in the BSP’s foreign reserves has largely been valuation-driven. What looks like disinflation is increasingly administrative maneuvers. What passes for growth is the rising use of leverage, mounting deficits, and liquidity injections rather than productivity or competitiveness.

In this sense, the peso’s decline is not an accident of global conditions. It is the byproduct of a political-economic regime that repeatedly socializes losses, crowds out private adjustment, favors centralization, predisposed to asset bubbles and substitutes newspeak for balance-sheet repair.

The exchange rate is not the problem. It is the messenger.

____

References

Friedrich von Hayek, Choice In Currency, A Way To Stop Inflation, The Institute Of Economic Affairs 1976

Prudent Investor Newsletters, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025

Prudent Investor Newsletters, USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress, Substack, December 21, 2025

Nassim Nicholas Taleb An Expert Called Lindy January 9, 2017

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

noreply@blogger.com (Unknown) — Sun, 04 Jan 2026 08:04:00 +0000

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today—Laurence J. Peter

Wishing you an exciting 2026: record highs, easy money, and all the risks that come with it.

In this issue:

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

I. The Echo Chamber of Optimism

II. Institutional Conflicts of Interest: Agency Problem and the Information Asymmetry

III. Global Euphoria vs. Local Fragility: A Market That Failed to Respond—Despite Every Attempt to Boost It

IV. Engineered Rallies and the BSP’s Easing Cycle Elixir

V. Mounting Concentration Risk and the ICTSI Distortion

VI. Foreign Selling, CMEPA, and the Gaming Bubble

VII. From Equities to Energy: Bailouts Without Calling Them Bailouts

VIII. A Lone Divergence: Mining and the War Economy

IX. The Philippine Treasury Market Confirms the Diagnosis

X. Conclusion: When Policy Loses Its Grip

XI. Epilogue: The Façade of January Effects

Why the PSE Failed in 2025: Engineered Markets and Broken Policy Transmission

Why the PSEi 30 underperformed despite rate cuts, engineered rallies, and unprecedented policy support

I. The Echo Chamber of Optimism

Figure 1

Does the public even remember the barrage of starry-eyed headlines and sanguine projections that dominated discourse from late-2024 through 2025? (Figure 1)

From Goldman Sachs’ overweight upgrade on Philippine equities (November 2024), to the relentless amplification of projected PSEi 30 returns by the mainstream echo chamber, to a business media outfit hosting a Pollyannish stock market outlook forum in February 2025, optimism was not merely expressed—it was drilled into the public consciousness.

Strangely, at the forum, Warren Buffett’s aphorism—“be greedy when everybody is fearful”—was cited ironically at a time when virtually every expert was advocating optimism. Even “cautious optimism” emerged as the most defensive stance.

All told, media and institutional narratives throughout 2025 projected rising equities anchored on a strengthening GDP—an assumption that would soon have the rug pulled out from under it.

Figure 2

In hindsight, the establishment’s posture resembled a classic denial phase in a deflating PSEi 30 bubble cycle. (Figure 2)

II. Institutional Conflicts of Interest: Agency Problem and the Information Asymmetry

The fundamental problem lies in the structural conflicts of interest between financial institutions and the investing public.

This dilemma reflects classic agency problem and asymmetric information. The objectives of buy- and sell-side institutions—fees, commissions, deal flow—diverge materially from those of retail investors seeking risk-adjusted returns.

As a result, sales pitches camouflaged as institutional research or news are designed to attract savings/capital, not to interrogate risk–reward tradeoffs. The information disseminated to the public is therefore shrouded in adverse selection and biased framing.

Despite serious unintended consequences from excessive interventions—easy money distortions, fiscal crowding-out, regulatory interference, capital controls, bailouts, and capital-market price manipulation—this savings-depleting dynamic receives scant acknowledgment.

III. Global Euphoria vs. Local Fragility: A Market That Failed to Respond—Despite Every Attempt to Boost It

There is also little recognition that the Philippine Stock Exchange has vastly underperformed, despite extraordinary efforts to support it.

Figure 3

As global central banks embarked on a historic easing campaign and global equities posted a third consecutive year of double-digit gains, the PSEi 30 closed 2025 as the second-worst performer in Asia, ahead of only Thailand. (Figure 3, topmost pane)

Of 19 national bourses tracked by Bloomberg, 16 ended the year higher, averaging a striking 19.22% return—led by South Korea, Pakistan, Sri Lanka, and Vietnam. The Philippines, alongside Bangladesh and Thailand, stood out as an underperforming outlier. (Figure 3, middle graph)

This flagrant underperformance—despite substantial engineered pumps in Q4—laid bare the market’s internal fragilities.

IV. Engineered Rallies and the BSP’s Easing Cycle Elixir

In December, a series of price-distorting late-session “afternoon delight” and pre-closing “rescue pumps” lifted the PSEi 30 by 0.51% MoM.

These were concentrated in banks and property stocks, echoing the mainstream narrative that rate cuts should disproportionately benefit them. (Figure 3, lowest table)

Additional support came from ICTSI, following its powerful October–November advance. Although the rally peaked on December 12 before a mild pullback, ICT’s surge drove the services sector up 10.5% and lifted the headline index by 1.67% in Q4.

Figure 4

For context, the BSP’s first rate cut in August 2024 was initially sold as an elixir, propelling the PSEi 30 up by a remarkable 13.4% in Q3 2024. Yet a surprise weak Q3 2024 GDP print (+5.2%) triggered a sharp reversal: –10.23% in Q4 2024 and –5.33% in Q1 2025. After another significant setback in Q3 2025 (–6.46%), the index fell –4.9% in 2H 2025. (Figure 4, topmost window)

Despite repeated interventions, the PSEi 30 closed 2025 down 7.29%.

V. Mounting Concentration Risk and the ICTSI Distortion

Since peaking in 2018, the PSEi 30 has recorded six negative return years out of the last eight—an unmistakable sign of a debt-trapped, late-cycle economy. (Figure 5, middle chart)

The index’s internals underscore this bearish backdrop: 24 of 30 constituents ended 2025 in the red, averaging a –6.87% decline. (Figure 4, lowest image)

Figure 5

Yet again, ICTSI—the PSE’s largest market-cap stock—nearly single-handedly prevented a deeper collapse. Its 46.9% full-year gain pushed its free-float weight to a record 17.8% in mid-December, ending the year at 16.5%. (Figure 5, topmost diagram)

Consequently, the combined free-float weight of the top 5 heavyweights to a record 53% but closed at 52.16% still proximate to an all-time high. (Figure 5, second to the highest visual)

Adjusted for the peso’s 1.6% YoY depreciation to a record low, the PSEi 30 fell 8.78% in USD terms—its seventh year of decline since 2017. (Figure 5, second to the lowest image)

The dollar index DXY fell by about 9.6% in 2025.

VI. Foreign Selling, CMEPA, and the Gaming Bubble

The broader PSE fared no better. Outside a handful of names, most issues declined and market internals remained weak. (Figure 5, lowest chart)

While synchronized “national team” pumping supported headline levels, it was largely offset by persistent foreign selling—a dominant force since 2018.

Figure 6

Foreign participation rose to 49.18% of gross volume in 2025, the highest since 2021. (Figure 6, topmost window)

That said, under globalization and financialization, “foreign selling” does not necessarily imply foreign fund liquidation. Many elite-owned firms operate through offshore vehicles and could be part of the ‘foreign’ trading activities.

In the meantime, gross and main board volume (MBV) rose 14.64% and 19.13% in 2025, but most of this activity peaked around the CMEPA rollout in July and slowed materially thereafter. Ironically, the capital-consumption effects of the law generated unintended consequences: asset bubbles, negative returns, and corroding liquidity. (Figure 6 middle image)

For example, as the government cracked down on digital gambling, the PLUS gaming bubble accounted for a staggering 11.65% of main board volume in Q3 2025, revealing how speculative excess merely migrated into the PSE—absorbing retail savings in the process.

In 2025, concentration activities intensified: the top 10 brokers averaged 63.44% of Q4 main board volume; the top 20 accounted for over 82% both in Q4 and full-year 2025 MBV.

VII. From Equities to Energy: Bailouts Without Calling Them Bailouts

Engineered rescue rallies are not cost-free. They amplify concentration risk, intensify late-cycle fragility, and expose deeper balance-sheet stress driven by debt-financed asset support and misallocation.

This pattern extends beyond equities.

Authorities initiated a soft bailout of the energy sector—first indirectly via the SMC–AEV–MER asset-transfer triangle, and later through Real Property Taxes (RPT) waivers favoring elite-owned IPPs. This was followed by another buy-in: Prime Infrastructure’s acquisition of a 60% stake in FGEN’s Batangas LNG project, alongside higher consumer charges via GEA-All layered on top of FIT-All.

VIII. A Lone Divergence: Mining and the War Economy

For the first time, the mining sector not only outperformed but diverged meaningfully from the PSEi and broader market. Its performance reflects exposure to global commodity dynamics—finance, geopolitics, and the war economy—rather than domestic demand. (Figure 6, lowest graph)

While retracements are possible given overbought conditions, current signals suggest any correction may be cyclical rather than trend-reversing.

IX. The Philippine Treasury Market Confirms the Diagnosis

The warning signs extend to Philippine treasury markets.

Figure 7

By end-2025, the Philippine BVAL curve had clearly steepened relative to the flattish 2023–2024 profile, though it remained less extreme than the pandemic-era 2022 BSP rescue year. This shift points less to growth optimism and more to rising risk premia. (Figure 7, upper diagram)

While short-dated T-bill yields have not fallen back to 2022 levels—despite policy rate cuts, aggressive RRR reductions exceeding pandemic-era easing, and the doubling of deposit insurance—long-term yields remain materially higher than in 2023–2024, signaling mounting market concern over fiscal conditions, debt supply, and credibility.

The resulting mixed yield configuration, occurring alongside slowing GDP growth and persistently elevated bank lending rates, reflects not selective liquidity management but a failure of monetary transmission: BSP sought genuine easing, yet impaired bank balance sheets, malinvestment, and fiscal overhang have rendered markets far less malleable than policymakers expected.

X. Conclusion: When Policy Loses Its Grip

Taken together, the events of 2025 expose a Philippine financial system increasingly governed by intervention rather than price discovery—and increasingly constrained by balance-sheet fragility rather than cyclical weakness.

Despite aggressive policy easing activities, engineered equity support, regulatory inducements, and explicit and implicit bailouts, markets failed to respond as expected. Instead, concentration deepened, liquidity thinned, and monetary transmission weakened.

The underperformance of the PSEi 30 was not an anomaly but a symptom. Equity pumps masked deterioration; index ‘strength’ concealed internal decay.

The peso weakened, bond yields re-priced fiscal risk, bank lending rates remained elevated, and savings were quietly consumed through speculation and policy distortion. What appeared as support increasingly functioned as stress transfer—from institutions to households, from balance sheets to prices, and from the present to the future.

In this sense, 2025 was not merely a bad year for Philippine equities. It was a year in which markets signaled—clearly and repeatedly—that policy credibility, strained by diminishing returns and collapsing transmission/tightening effective liquidity, had become the binding constraint.

Until balance-sheet repair, fiscal discipline, and genuine price discovery are restored, further intervention may sustain appearances—but not balance-sheet health or durable confidence.

XI. Epilogue: The Façade of January Effects

January has historically been a strong month for the PSE, often reflecting the so-called ‘January effect’—seasonal inflows driven by year-end cash balance surpluses, portfolio reallocations, and tactical positioning.

Using the January 2018 peak as the reference point, the PSEi 30 has posted January gains in five of the past eight years (62.5%). Yet over that same post-2018 cycle, full-year returns have been negatives/deficits in six of those years (75%). The implication is clear: early-year strength has repeatedly failed to translate into durable annual performance. (Figure 7, lower chart)

Even so, institutional cheerleading is likely to intensify. Seasonal rallies will be framed as confirmation of recovery, even as stimulus-driven activity continues to deepen debt-led imbalances and erode household savings.

This is not to suggest that the PSEi 30 must necessarily close 2026 in negative territory. Rather, when façade substitutes for structure—when form is elevated over substance—market fragility increases.

Under such conditions, for the general market, the probability of risk and loss continues to outweigh potential gains, regardless of how loudly institutions beat the drum for a bull market.

Meanwhile, the risk of a meltdown looms.

____

Select References

Prudent Investor Newsletters, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 07, 2025

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025

Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025

Prudent Investor Newsletters, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t Substack, November 16, 2025

Prudent Investor Newsletters, The Philippine Flood Control Scandal: Systemic Failure and Central Bank Complicity, Substack, October 05, 2025

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, August 3, 2025

Prudent Investor Newsletters, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025

Prudent Investor Newsletters, The Ghost of BW Resources: The Bursting of the Philippine Gaming Stock Bubble Substack, July 6, 2025

Prudent Investor Newsletters, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

noreply@blogger.com (Unknown) — Sun, 21 Dec 2025 03:42:00 +0000

The pretended solicitude for the nation’s welfare, for the public in general, and for the poor ignorant masses in particular was a mere blind. The governments wanted inflation and credit expansion, they wanted booms and easy money—Ludwig von Mises

In this issue:

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility

II. Strong US Dollar Narrative Debunked

III. BSP’s Easing Cycle, Data vs. Narrative

IV. Cui Bono? (Redux)

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables

VII. Averch–Johnson Trap and Public Choice Theory in Action

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets

IX. Bank Liquidity Strains Beneath the Surface

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

XI. Keynesian Malinvestment and Policy Distortions

XII. AFS Losses and HTM Fragility

XIII. Banks Compound the Crowding Out Dynamics

XIV. The Biggest Borrower Is the State

XV. Public Revenues Are Collapsing

XVI. A Budget as Bailout

XVII. The Sovereign–FX–Savings Doom Loop

VIII. Conclusion: The Real Story: Bailouts Everywhere

XIX. Encore: From “Manageable Deficit” to Crisis Trigger

Notice: This will likely be my last post of 2025 unless something interesting comes up. Have a safe, relaxing, and enjoyable holiday season! 🎄🎅

USD-PHP at Record Highs: The Three Philippine Fault Lines—Energy Fragility, Fiscal Bailouts, Bank Stress

From peso weakness to systemic unraveling: energy and fiscal bailouts, malinvestment, and the illusion of stability.

I. USDPHP Record, BSP Rate Cuts, and Banking-Fiscal Fragility

On December 9, the USDPHP surged to a new record high—its third all-time highs since crossing the BSP’s 59-level “Maginot Line” on October 28. Yet despite the historic print, the pair has traded within an unusually narrow range—depicting active BSP intervention to suppress volatility

This suppression of volatility has continued to date, with USDPHP retreating to the 58 level. The pair closed at 58.7 on December 19, roughly 0.9% below the record high of 59.22.

Media outlets swiftly attributed the move to expectations of a BSP rate cut. Others defaulted to the familiar refrain of a “strong dollar.”

II. Strong US Dollar Narrative Debunked

Let us address the latter first.

On the day the peso set a new record low, the US dollar weakened against 24 of the 28 currency pairs tracked by Exante Data. The Philippine peso stood out as one of only four Asian outliers—during a week when Asian FX broadly strengthened.

Figure 1

Moreover, the USDPHP has been on a steady ascent since May 2025, while the dollar index (DXY) peaked in September and has since shown signs of exhaustion. There is zero empirical basis to attribute this peso collapse to dollar strength. (Figure 1, topmost pane)

But attribution often follows convenience—particularly when political patrons prefer comforting narratives.

III. BSP’s Easing Cycle, Data vs. Narrative

Now back to the first premise: interest rates as tinder to the USDPHP fire.

Two days after the peso hit its latest record, the BSP announced its fifth policy rate cut of 2025 on December 11, the eighth since the easing cycle began in August 2024. This was accompanied by two reserve requirement (RRR) cuts—in September 2024 and March 2025—the latter bundled with a doubling of deposit insurance coverage.

Why this aggressive easing?

Like a religious incantation, the establishment rationalized BSP’s actions as growth stimulus. As the Inquirer noted, the BSP acted "as concerns about weakening economic growth outweighed the risks of peso depreciation."

The BSP claims data-dependence. But has it examined its own history?

Instead of catalyzing growth, repeated easing cycles have coincided with GDP deceleration— from 2012–2019, and again during the post-pandemic banking system rescue from Q2 2021 onward, even after interim rate hikes. (Figure 1, middle window)

The much-cited “flood control” episode only emerged in Q3 2025, long after the damage was done.

So the question remains: cui bono?

IV. Cui Bono? (Redux)

Certainly not MSMEs.

The beneficiaries are balance-sheet-heavy incumbents with preferential access to credit, regulatory relief, and FX protection.

Bank compliance rates for MSME lending fell to historic lows in Q3 2025 as headline GDP slowed to pandemic levels. (Figure 1, lowest chart)

The post–Global Financial Crisis easing playbook produced the same result: banks found it cheaper to pay penalties than lend to MSMEs.

Most tellingly, the BSP removed the MSME lending compliance data from its website last week.

And why now?

Because the data exposes the failure of both the Magna Carta for MSMEs and the BSP’s easing doctrine: liquidity was created, but it never reached the productive economy—the transmission channel broke down.

This is not a failure of transparency.

The peso is not reacting to rate cuts as stimulus. It is repricing a regime in which monetary easing now functions as fiscal accommodation and elite stabilization—diverting and diminishing productive credit.

Removing an indicator does not eliminate the risk factor—it merely eliminates early-warning signaling

And elite debt is one of the central forces driving this policy response.

V. More Energy Bailouts: Prime Infrastructure-First Gen’s Batangas Energy Buy-in Deal

As we have previously noted: “In the first nine months of 2025, the 26 non‑bank members of the elite PSEi 30 added Php 603.149 billion in debt—a growth rate of 11.22%, pushing their total to an all‑time high of Php 5.979 trillion. This was the second fastest pace after 2022.” (see reference, PSEi 30 Q3 and 9M 2025 Performance, November)

And that’s just the PSEi 30.

Financial fragility has intensified to the point that authorities have begun instituting explicit and implicit bailout measures.

The regulatory relief via the suspension and forgiveness of real property taxes (RPTs) for independent power producers (IPPs) provided circumstantial—but powerful—evidence that the SMC–AEV–Meralco triangle was not an isolated deal, but part of a phased continuum: transactional camouflage, regulatory condonation, financial backstopping—ultimately leading to either socialization or forced liberalization. (see reference, Oligarchic Bailout—December)

Crucially, the asset-transfer phenomenon in the energy sector is not confined to the SMC–AEV–MER axis. (see reference Inside the SMC–Meralco–AEV Energy Deal—November)

Prime Infrastructure, controlled by tycoon Enrique Razon, acquired 60% of Lopez owned First Gen’s Batangas assets for Php50 billion. This occurred alongside broader liquidity-raising measures by the Lopez Group, including the sale of roughly 30,000 square meters of its ABS-CBN headquarters in Quezon City for Php 6.24 billion, and the termination of the ABS-CBN–TV5 partnership due to financial disagreements.

VI. Political Redistribution: Consumers to Subsidize Debt-Heavy, Elite-Owned Renewables

At the same time, regulatory support has extended beyond asset transfers.

The Energy Regulatory Commission (ERC) approved the collection of the Green Energy Auction Allowance (GEA-All) on top of the existing Feed-in Tariff Allowance (FIT-All), explicitly allowing renewable developers to recover costs directly from consumers. These mechanisms institutionalize tariff pass-throughs as balance-sheet support.

Figure 2

Aggregate data underscore the scale of the problem. As of 9M 2025, the combined debt of major listed renewable firms—AP, ACEN, FGEN, CREC, SPNEC, and ALTER—surged from Php Php490.1 billion in 2024 to Php 682.2 billion in 2025, a 39.2% increase! (Figure 2, topmost table)

The sharpest percentage increases came from SPNEC, ALTER, and CREC.

Taken together, debt is the common thread now binding the Philippine energy sector’s restructuring.

Beyond the SMC–AEV–Meralco triangle, leverage stress is visible across ownership groups. First Gen’s heavy debt load, the Lopez Group’s asset disposals, and Prime Infrastructure’s acquisition of operating assets all point to balance-sheet defense rather than expansion. These are not growth reallocations but late-cycle capital triage.

The Prime Infra–First Gen transaction fits the same pattern seen elsewhere: risk is being relocated, not resolved. Mature energy assets migrate toward entities best positioned to manage regulatory and political risk, while leverage remains embedded in the system. Market discipline is deferred, price discovery suppressed, and time is bought—without reducing aggregate debt exposure and systemic malinvestments

These are not M&A events. These are distressed-asset reallocations under sovereign protection.

Renewables exhibit the same logic through a different channel.

VII. Averch–Johnson Trap and Public Choice Theory in Action

Under FIT-All and GEA-All, tariff pass-throughs convert private leverage into consumer-backed cash flows.

This is the Averch–Johnson trap in practice: capital intensity and debt are rewarded, inefficiency is preserved, and default risk is implicitly backstopped—reaffirming public choice theory in action: concentrated benefits, dispersed costs; privatized gains, socialized losses.

Firms such as SPGEN, ALTER, and ACEN are not anomalies. They are rational actors responding to a regulatory regime that socializes balance-sheet stress through electricity prices.

All these said, asset transfers in conventional power and tariff-embedded support for renewables show that the sector is no longer allocating capital for efficiency or growth. It is preserving leverage. Whether through strategic transactions or regulatory pass-throughs, losses are being deferred and dispersed—into consumers, banks, and ultimately the sovereign—confirming that the energy sector has entered a late-cycle rescue phase rather than a genuine transition.

In the Philippines, ESG is not a financing premium—it has become a political guarantee of revenue recovery.

In essence, these bailouts are not energy policy. They are rent-seeking protectionism.

VIII. Elite Debt vs. Counterparty Exposure, Bank Centralization of Financial Assets

But elite debt isn’t the only problem.

For every borrower is a creditor—a counterparty. And banks are heavily exposed.

Total financial resources (TFR) rose 6.76% to Php 35.311 trillion, with bank assets expanding faster at 7.2% to Php29.21 trillion last October. (Figure 2, middle image)

Both sit at the second-highest nominal levels on record. Banks now hold 82.74% of TFR, and universal/commercial banks (UCs) account for 76.8% of that. UC banks make up 92.87% of total bank assets.

The Bank-UC share of TFR has risen steadily since 2007—and the pandemic recession accelerated that centralization trend.

Fundamentally, bank centralization of financial assets means:

They dominate credit allocation and distribution.
They generate and circulate most liquidity and money supply.
In a low-volume, savings-deprived system, they are the dominant players in capital markets (stocks and bonds).
They command the financial-intermediation process.

A BSP-driven concentration of financial assets therefore escalates concentration risk. Yet almost no mainstream analysts address this.

IX. Bank Liquidity Strains Beneath the Surface

Even less is said about the intensifying liquidity strains in the banking system.

Despite supposedly “manageable” NPLs, banks’ cash-to-deposit ratio hit all-time lows last October. Liquid assets-to-deposits plunged to 47.44%— a level last seen during the March 2020 pandemic outbreak—essentially erasing the BSP’s historic Php 2.3 trillion liquidity injection. (Figure 2, lowest graph)

This signals that tightening bank cash reserves mirrors tightening corporate liquidity.

And the pressures are not just from the elite portfolios—they span bank operating structure.

X. The Wile E. Coyote Illusion of Stability, Bank’s Strategic Drift to Consumer Lending

Figure 3

NPL ratios have been propped up by a Wile E. Coyote velocity race: NPLs are near all-time highs, but their growth is masked by faster loan expansion. The 3.33% gross NPL ratio in October reflects gross NPL growth of 2.43% YoY versus 10.7% TLP growth. As long as credit velocity outruns impairment, the illusion of stability persists. (Figure 3, topmost visual)

Yet NPLs also remain strangely “stable” even as GDP momentum breaks and unemployment rises—an inversion of normal credit dynamics. In a normal cycle, deteriorating growth and labor markets should push impairments higher; the fact that they don’t suggests suppression, rollover refinancing, and delayed recognition rather than genuine asset quality.

Consumer credit cards illustrate the spiral—receivables at Php 1.094 trillion, NPLs at Php 52.72 billion, both at record highs. (Figure 3, middle diagram)

Since 2020, the BSP’s rate cap and the recession pushed banks toward a consumer-credit model—where consumer credit growth now outpaces production loans. That dynamic amplifies inflation: too much money chasing too few goods.

The consumer-loan share of UC lending (ex-real estate) hit a record 13.73% in October, while production loans fell to 86.27%—an all-time low. (Figure 3, lowest chart)

XI. Keynesian Malinvestment and Policy Distortions

This reflects Keynesian stimulus ideology—the belief that consumers can borrow and spend their way to prosperity. Its Achilles heel is the disregard for balance sheets and malinvestment risks.

Banks have now wagered not only on elites but a widening consumer base—including subprime borrowers. And because participation in consumer credit remains limited, concentration keeps rising.

Pandemic-era regulatory relief still suppresses benchmark NPL recognition.

XII. AFS Losses and HTM Fragility

Simultaneously, banks accelerated balance-sheet leverage through Available-for-Sale (AFS) assets—another velocity game.

Figure 4

Losses in financial assets have slowed earnings. AFS exposure surged from 3Q 2023 to today, closing the gap with Held-to-Maturity (HTM). As of October, AFS and HTM made up 41.04% and 51.21% of financial assets, respectively. (Figure 4, topmost diagram)

Financial-asset losses climbed from Php 16.94 B (1Q 2023) to Php 41.45 B (3Q 2025), which capped profit growth—banks earned just 2.5% more in 3Q 2025. (Figure 4, middle image)

HTMs act as hidden NPLs and suppressed mark-to-market losses, worsening liquidity drought. Cash ratios peaked in 2013 and have declined ever since—mirroring the rise of HTM.

It’s no coincidence that record-high HTMs accompany the surge in banks’ net claims on central government (NCoCG). In October, NCoCG hit Php5.663 T (2nd-highest on record), and HTMs reached Php4.022 T (also near a record). (Figure 4, lowest graphs)

Siloed government securities—rationalized under "Basel compliance"—combined with NPL overhang (consumer and likely under-reported production) and asset losses help explain slowing deposit growth.

Velocity masking is inherently pro-cyclical. When velocity slows, NPL truth appears—all at once

XIII. Banks Compound the Crowding Out Dynamics

Banks are now forced to compete with elites and the government for scarce household savings.

Figure 5

Bank bonds and bills payable stood at Php1. 548 trillion in October 2025, down 3.44% YoY but still hovering near record highs. (Figure 5, topmost pane)

To meet FX requirements and even assist the BSP in propping up Gross International Reserves (GIR), banks have increasingly tapped global capital markets. BSP data show the banking system’s external debt rose 0.3% to $28.97 billion in Q3 2025—its third‑highest level. BDO itself raised US$500 million through five‑year fixed‑rate senior notes in November 2025. (Figure 5, middle graph)

Meanwhile, BSP’s Net Foreign Assets climbed 2.12% YoY, driven by a 26.3% surge in Other Deposits Corporation (ODC) FX assets—a growth spiral over the last three months that underscores a rapid FX-liquidity build-up outside deposit funding and a scramble for offshore liquidity.

When banks become the transmission channel for fiscal deficits, corporate rescues, consumer support, and green‑subsidy pipelines, the endgame isn’t stability—it is deposit fragility, duration risk (asset‑liability mismatch), and the erosion of market discipline. These are the seeds of a balance sheet crisis, with BSP backstops looming ominously over a weak peso.

XIV. The Biggest Borrower Is the State

The biggest borrowers are not only the elites and the banks—the government itself stands at the center.

Last September, the Bureau of Treasury signaled that public debt would ease toward year-end through scheduled amortizations and a slowdown in issuance.

We warned that without genuine spending restraint; any dip would be a temporary statistical blip.

And so it was. After two months of declines, public debt surged 9.6% YoY to Php 17.562 trillion in October—just Php1 billion shy of July’s record Php17.563 trillion. Local borrowings climbed 10.6%, outpacing external debt growth of 7.53%.

Why would debt slow when deficit spending remains unchecked?

XV. Public Revenues Are Collapsing

Authorities and media largely ignored the mechanics behind October’s seasonal surplus (Php 11.154 billion), driven by a reporting artifact (the shift from monthly to quarterly VAT).

They fixated on the headline numbers: a spending dip linked to the flood-control scandal, and 6.64% shrinkage in collections.

The bigger picture was ignored: BIR’s 1.02% growth was its weakest since December 2023; Bureau of Customs fell 4.5%; non‑tax revenues collapsed 53.3%

The 10-month numbers confirm structural decay: revenue growth slid to 1.13%, the weakest since 2020. Tax revenue growth of 7.45% is also at post-pandemic lows. BIR’s 9.6% is a four-year trough; BoC’s 0.9% has drifted toward contraction; non-tax revenues collapsed 36.7%—the weakest since at least 2009.

A narrow decline in the fiscal deficit (Php1.106 trillion—third-largest on record) provides no comfort. With two months remaining, the deficit can surpass 2022’s Php1.112 trillion and approach 2021’s Php1.203 trillion—entirely dependent on tax performance. (Figure 5, lowest visual)

Since GDP drives revenues, these numbers reaffirm the dynamic: slowing growth, rising unemployment, yet oddly “stable” NPLs—a contradiction sustained by velocity illusions.

Expenditure growth may remain muted by political scandal, but revenue weakness is decisive.

XVI. Debt and Debt Servicing Is Crowding Out Everything Else

Record public debt now drives record servicing. As of October, Php1.935 trillion in debt payments has nearly breached the Php2.02-trillion 2024 record—a gap of barely 4.3% with two months to go.

The identity is mechanical: (as discussed last August, see reference)

More debt → more servicing → less for everything else
Public and private spending are crowded out
Revenue cannot keep pace with amortization
FX depreciation and inflation risks accelerate
Higher taxes become inevitable

This process is becoming more apparent by the month.

XVI. A Budget as Bailout

Yet ideology prevails. Despite weakening revenues and slowing nominal GDP, Congress has passed a record Php 6.793‑trillion 2026 budget.

Figure 6

The headline implies “just” a 7.4% increase from 2025, but because spending targets for 2025 were revised downward, the 2026 expansion is far larger once fully implemented. (Figure 6, topmost window)

The cut to DPWH—politically expedient after a corruption uproar—was simply reallocated to entities like PhilHealth. No discipline, just reshuffling.

Record spending in the face of a deteriorating economy is not stimulus—it is a fiscal bailout in progress.

XVII. The Sovereign–FX–Savings Doom Loop

An economy with an extreme savings-investment gap and a quasi-‘soft peg’ to the USD must fund deficits externally. Public sector foreign debt reached USD 90.6 billion in Q3—up 11.7% YoY, with a record 61% share of the total. (Figure 6, middle image)

Every peso the state cannot fund through revenue must be sourced from bank balance sheets—through deposits, government securities, or offshore borrowing. The sovereign becomes a debtor to the banking system, and the banks become debtors to households. That is the sovereign–bank–household doom loop.

This external financing occurs despite a stretched fiscal capacity: the Q3 deficit-to-GDP ratio of 6.63% was the fourth-widest on record, achieved at the expense of households via intensifying financial repression and crowding-out. (Figure 6, lowest chart)

Despite mainstream optimism about “manageable” fiscal health, current dynamics risk unraveling into fiscal shock.

Monetary loosening—locally and globally—is masking fragility. When that cover fades, the peso absorbs the shock.

VIII. Conclusion: The Real Story: Bailouts Everywhere

While the public fixates on the corruption scandal, bailouts continue in real time—implicit and explicit, fiscal and regulatory.

The SMC–AEV–Meralco and Prime Infra–First Gen transactions are political rescue operations transferring assets among leveraged elites.
Direct relief has been delivered through taxpayer-funded suspensions (e.g., Real Property Taxes for IPPs) and electricity price hikes to sustain overleveraged “green” portfolios.
Record fiscal outlays shift resources toward the state, elite firms, and banks.
BSP’s easing cycle provides the monetary channel to accommodate the whole structure.

This is not reform—it is redistribution upward.

The great economist Frédéric Bastiat’s "legal plunder" describes the mechanism; Acemoglu-Robinson’s extractive institutions describe the outcome: enrichment of incumbents, depletion of the real economy, and accumulation of malinvestment.

A fourth fault line left to be discussed: The Philippine real estate bubble.

XIX. Encore: From “Manageable Deficit” to Crisis Trigger

2025 already saw GDP pull the rug out from under the institutional optimists.

The next phase is simpler:

Rising debt
Weakening revenues
Record spending
External borrowing
Peso strain
Price pressures
Monetary accommodation
Banking-system transmission

This is how sovereign balance-sheet stress becomes a macro-financial shock.

The question is no longer whether debt climbs.

It is whether the system can finance it without a solvency event.

Will 2026 be the year national finances follow Ernest Hemingway’s arc—gradually, then suddenly?

And when the adjustment comes, does the peso simply slip past 60—or does something in the system fracture before it gets there?

Because the endgame of fiscal ochlocratic social democracy isn’t fairness—it’s insolvency masked as compassion.

_____

References:

Prudent Investor Newsletter, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025

Prudent Investor Newsletter, The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy, Substack, December 7, 2025

Prudent Investor Newsletter, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23,2025

Prudent Investor Newsletters, June 2025 Deficit: A Countdown to Fiscal Shock, Substack, Substack, August 3, 2025

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy

noreply@blogger.com (Unknown) — Sun, 07 Dec 2025 02:28:00 +0000

Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly—Nassim Nicholas Taleb

In this issue

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy

I. Drowning in Debt: Philippine Government Bails Out the Energy Industry!

II. What the RPT Relief Confirms; The Four Phase Bailout Template

III. Phase 1 — Transactional relief: Chromite–San Miguel deal

IV. Phase 2 — RPT Cut: The Regulatory Relief

V. Phase 3 — Financial System Backstopping

VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase

VII. Phase 4 — Political Resolution: Socialization

VIII. Phase 4a – Socialization vs. Forced Liberalization

IX. Why This is s Late-Cycle Phenomenon

X. Conclusion: This Episode Was Never About Electricity Prices

The Oligarchic Bailout Everyone Missed: How the Energy Fragility Now Threatens the Philippine Peso and the Economy

The four phases of the SMC–AEV–Meralco rescue reinforce the logic of late‑cycle fragility

I. Drowning in Debt: Philippine Government Bails Out the Energy Industry!

In the third week of November, we noted:

The triad of San Miguel, Aboitiz, and Meralco illustrates deepening centralization, pillared on a political–economic feedback loop.
Major industry transactions, carried out with either administration blessing or tacit nudging, function as implicit bailouts channeled through oligarchic control. (bold original)

That thesis was quietly confirmed weeks later.

Buried beneath the torrent of daily headlines was a development of first-order importance.

Figure 1

GMANews, December 3, 2025: President Ferdinand Marcos Jr. has ordered the reduction and pardon of all interest and penalties on real property taxes (RPTs) levied on independent power producers (IPPs) for 2025. In a statement, Malacañang said the cut in RPT liabilities of IPPs is "to prevent defaults and economic losses that could affect electricity supply and the government’s fiscal stability." (bold added) (Figure 1, upper news clip)

Bullseye!

This was not a routine tax adjustment. It was an explicit admission that private-sector leverage—specifically within the power industry—had crossed into systemic risk territory.

It bears noting that the five largest power firms by market position are San Miguel, Aboitiz Power, First Gen, PSALM, and ACEN (Mordor Intelligence, 2024).

The sector is tightly concentrated, politically franchised, and structurally shielded from competition.

Aggregate 9M debt for the proponents of the Batangas LNG–Ilijan–EERI triangle—the SMC–AEV–MER troika—soared 16.4% YoY, reaching a record Php 2.254 trillion. Financing charges likewise jumped 8.3% YoY, hitting Php 101.17 billion, an all-time high. (Figure 1, lower chart)

In that same November post, we asked what this meant for 2025–2026. The answer was already embedded in the corporate balance sheets:

cash liquidity is tightening
banks are approaching risk limits
debt has become the default funding model
headline GDP growth is increasingly sustained by inter-corporate transactions rather than productive capex
large conglomerates are supporting one another through balance-sheet swaps

According to the Inquirer.net, this marks the third time (2023, February 2025 and December 2025) the incumbent administration has forgiven or reduced RPT-related financial charges. That pattern matters.

Because this bailout arc pushes leverage toward the public balance sheet, the Philippine peso becomes the pressure valve of last resort

II. What the RPT Relief Confirms; The Four Phase Bailout Template

This latest RPT condonation has four critical implications:

1. Political brokerage: Confirms the deal was arranged and brokered politically—a backstop to buy time, not reform.

2. Elite rescue: The energy sector operates through de facto monopolistic political franchises; relief accrues to incumbents, not consumers.

3. Late-cycle marker: Preemptive default prevention reflects an economy drifting into business-cycle exhaustion, where failures are no longer politically tolerable.

4. Counterparty contagion: Because creditors to IPPs are also elite-controlled, counterparties will need support—expanding the bailout perimeter.

What we are now observing is a four-phase bailout arc in the Philippine energy sector:

Transactional Relief → Regulatory Relief → Financial System Backstopping → Resolution by Socialization/Forced Liberalization.

III. Phase 1 — Transactional relief: Chromite–San Miguel deal

The opening move comes disguised as a "strategic partnership."

In reality, AEV/Meralco—through Chromite Gas Holdings—absorbed San Miguel’s stressed LNG and Ilijan assets (SPPC, EERI, related industrial estate and terminal exposure). Balance-sheet pressure is eased without declaring stress; earnings volatility was suppressed, and leverage was redistributed rather than reduced—in the interim.

This phase is intentionally ambiguous. No one calls it a rescue. There is no emergency language, no fiscal line item. The objective is clear: prevent immediate balance-sheet failure without triggering market discipline, buying time before the state is forced to intervene.

It sets a crucial precedent—private leverage can be quietly transferred and restructured under the guise of efficiency.

This is a classic late-cycle hallmark: defaults become politically unacceptable, but overt bailouts are still premature.

IV. Phase 2 — RPT Cut: The Regulatory Relief

The next phase shifts from private camouflage to public condonation. The RPT cut is decisive.

Malacañang’s own justification—"to prevent defaults and economic losses that could affect electricity supply and fiscal stability"—reframes private leverage as a public-interest problem. That line is the SMOKING GUN!

At this stage, the bailout is no longer implicit; it is simply reframed as stability policy.

Fixed costs are reduced, cash flows are protected, local governments (including Special Education Fund allocations) lose revenue, and political risk is shifted from firms to the sovereign.

Concentrated gains, distributed costs—the political rent-seeking model, public choice theory in action.

Bluntly, profits remain privatized while costs are socialized—a political free lunch and textbook oligarchic capture.

This phase entrenches moral hazard: elites learn leverage will be accommodated, not disciplined. Smaller players and consumers are sidelined; political-economic imbalances mount, fragility escalates.

Crucially, previous rounds of subsidies have failed to repair balance sheets or deliver durable consumer relief. The evidence is clear: these measures stabilize optics, not fundamentals.

These two phases are ex-post. We now turn to the potential ex-ante stages.

V. Phase 3 — Financial System Backstopping

This phase is partly in process and could intensify.

Why issue such a justification unless there is a clear and present danger?

The fact that this is the SECOND time in 2025 that authorities have subsidized IPPs through RPTs speaks volumes about the underlying problems

Despite the BSP’s aggressive easing cycle—rate cuts, reserve‑requirement reductions, doubled deposit insurance, and record public spending that has pushed deficits back toward pandemic levels—liquidity stress persists. This signals a supply-side balance-sheet problem, not a demand shortfall.

The stress point is becoming unmistakable: elite-owned leverage, particularly in capital-intensive sectors like power—amid slowing growth.

Figure 2

According to the BSP’s Depository Corporations Survey, as of October the private sector’s share of domestic claims rose to 64.7%, while the combined financial and private sector share of M3 climbed to 80.63%. In Q3, domestic claims reached 77.6% of GDP, nearly matching the pandemic highs of 77.7% in Q1 and Q4 2021. By contrast, M2 and M3 shares of GDP—though still elevated since the pandemic recession—have been slowing, a clear departure from their previous synchronous trajectory during 2006–2020. (Figure 2)

This divergence underscores the core problem: systemic leverage has risen through domestic claims, concentrated among elite firms, yet its transmission to real economic activity has weakened.

This is the reason for the rescue mission.

VI. Phase 3a — The Policy Trap or the Escalating Systemic Risk Phase

As unproductive leverage persists and economic growth slows, bank balance sheets deteriorate. Liquidity tightens, lending slows, and stress migrates from corporates to the financial system.

The BSP will likely respond with escalating use of its pandemic playbook:

Deepening easing: policy-rate and RRR cuts
Implicit injections through BSP facilities.
Explicit support: direct infusions (e.g., the Php 2.3 trillion precedent).
Regulatory forbearance: capital relief and provisioning leniency.
Soft-peg defense: attempts to stabilize USD/PHP.

Yet contradictions mount.

Figure 3

Monetary easing is constrained by inflation and FX risk; tightening risks amplifying bank stress. Domestic liquidity and external liabilities have been key drivers of the USDPHP’s rise. (Figure 3)

As domestic claims rise without generating real-sector activity, liquidity hoarding intensifies, weakening the monetary transmission mechanism and amplifying FX vulnerability.

The USD/PHP soft-peg becomes fragile—defense drains reserves, while abandonment risks inflation and capital flight.

Policy enters a trap: support the system and weaken the currency, or guard the currency and fracture the system.

Diminishing returns begin to cannibalize monetary and economic stability.

VII. Phase 4 — Political Resolution: Socialization

When liquidity support and regulatory masking can no longer hold, losses are formally absorbed by the state:

Nationalization: partial or full state control of critical assets.
Recapitalization: government injections into systemically important institutions.
Bad-bank vehicle: a ‘Freddie Mac’–style structure to warehouse distressed assets while preserving legacy ownership.

Losses are socialized; control is recentralized.

The public balance sheet expands sharply while elite actors exit with preserved equity, retained assets, or negotiated upside. What began as a "strategic deal" ends as systemic capture, with nationalization the final stop in a late-cycle rescue arc.

VIII. Phase 4a – Socialization vs. Forced Liberalization

Late-cycle bailout arcs bifurcate.

If the state retains fiscal and monetary capacity, losses are socialized through nationalization or resolution vehicles. If capacity is lost—via reserve depletion, inflation, or debt saturation—the system drifts toward forced liberalization. Market discipline is not restored deliberately; it re-emerges violently.

In this scenario, incumbent protections collapse, policy support evaporates, and asset values are repriced downward. It may resemble "liberalization," but it is not reform—it is involuntary liquidation triggered by exhausted savings and unsustainable balance sheets or by unsustainable economics—resulting in disorderly transitions, and heightened political instability.

Ideology shapes the preferred response.

The populist embrace of social democracy, with its preference for top-down conflict resolution, skews the political response toward socialization.

But ideology is not sovereign and cannot override economics: real savings and fiscal capacity, not preference, ultimately determines which path the cycle takes. When the state can no longer absorb fragility, liberalization is not chosen—it is imposed.

IX. Why This is s Late-Cycle Phenomenon

These phases occur when:

Leverage is high.
Political tolerance for defaults has collapsed.
Asset extraction has run its course.
The state becomes the residual risk holder.

In early or mid-cycle, failure disciplines excess.

In late cycles, failure is deferred, masked, and ultimately absorbed by the public—after market discipline has already broken down.

X. Conclusion: This Episode Was Never About Electricity Prices

This episode was never about electricity prices.

The Philippine energy-sector rescue is not a single policy choice but a phased continuum: transactional camouflage, regulatory condonation, financial backstopping, and ultimately either socialization or forced liberalization. Each phase follows the same late-cycle logic—fragility is too politically costly to reveal, so it is deferred, disguised, and transferred away from the firms that created it.

What began as a "strategic partnership" now stands exposed as a systemic bailout, with the state increasingly positioned as the residual risk holder.

This is the defining feature of a late-cycle economy: leverage is high, defaults are politically intolerable, and oligarchic control ensure that private losses migrate toward the public balance sheet. Consumers and taxpayers ultimately bear the burden.

The real question is not whether the cycle ends in public absorption of losses, but how much fragility will be socialized before a reckoning becomes unavoidable.

Crucially, not all late-stage bailouts climax in outright socialization. When fiscal capacity collapses—through reserve depletion, inflation pressure, or debt saturation—the path can shift toward forced liberalization or selective deregulation and privatization.

This is not genuine reform but an involuntary unwind: protection collapses, policy support recedes, and assets are repriced downward. It looks liberal but functions as disorderly liquidation, with distributional costs shifted onto households while elites regroup.

Ideology shapes the state’s instincts. Populist social democracy, market‑averse and reliant on top‑down resolution, leans toward socialization. Liberalization, by contrast, rests on cooperation, division of labor, property rights, and rule of law — mechanisms that can resolve conflict without central command.

Yet ideology alone does not decide the path: fiscal capacity and real savings ultimately determine whether fragility is absorbed by the state or forced back into the market.

Thus, the endgame bifurcates:

1. Resolution by Socialization – nationalization, recapitalization, or bad-asset vehicles that warehouse losses while preserving incumbent control.

2. Resolution by Forced Liberalization – selective deregulation, privatization, and asset sales driven not by ideology but by incapacity, where the state abandons protection because it can no longer sustain it.

Both paths are late-cycle responses to the same underlying condition: systemic fragility accumulated over years of leverage, political accommodation, and institutional rent-seeking capture.

They differ not in purpose, but in the mechanism through which risk is transferred—and in both cases, the public ultimately shoulders the cost.

In late cycles, the currency becomes the final referendum on the system’s accumulated fragility

Caveat emptor.

____

References

Prudent Investor Newsletters, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025

Prudent Investor Newsletters, PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth, Substack, November 30, 2025

PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth

noreply@blogger.com (Unknown) — Sun, 30 Nov 2025 02:14:00 +0000

The ultimate cause, therefore, of the phenomenon of wave after wave of economic ups and downs is ideological in character. The cycles will not disappear so long as people believe that the rate of interest may be reduced, not through the accumulation of capital, but by banking policy—Ludwig von Mises

In this issue:

PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth

Part I: Cycles, Business Cycles, and Market Cycles

I.A Why Business Cycles Are Not Natural Phenomena

I.B. Credit Expansion and the Origin of Boom–Bust Cycles

I.C. Late-Cycle Fragility: Headline Resilience, Underlying Stress

I.D. Financial Fragility, Opacity, and the Bezzle

Part II: The Late Cycle in the Philippine Context: Economic and Corporate Activities

II.A. Macro and Policy Stimulus, An Environment Built to Support Growth

II.B. The GDP Surprise—and Why It Should Not Have Been One

II.C. The PSEi 30 Aggregate: A Disquieting Divergence From GDP, The Energy Trio Distortion

II.D. The 9-Month Scorecard: The Same Story, Amplified

II.E. Cash Drain, Debt Surge, and the Minsky Turn

II.F. Concentration, Money Illusion, and Elite Financialization

II.G. Sectoral Divergences: Real Estate, Retail, Food Services

II.H. Banking Fragility: Wile E. Coyote Finance

Part III: Conclusion: Late-Cycle Fragility Exposed

PSEi 30 Q3 and 9M 2025 Performance: Late-Stage Fragility Beneath the Headline Growth

PSEi 30 earnings, leverage, and liquidity strains reveal a late-stage business cycle

Part I: Cycles, Business Cycles, and Market Cycles

Cycles refer to a series of events that recur in the same order. This concept is most evident in nature: the Earth’s orbit around the sun produces the day–night cycle, while diurnal and seasonal cycles define time itself—days, weeks, months, and years. These natural rhythms shape life cycles, ecological systems, and nearly all activity on the planet.

Figure 1

Economic activity is no exception. Economies evolve through recurring phases collectively known as the business cycle—periods of expansion, peak, slowdown, and contraction over time. Financial markets or market cycles operate within a related rhythm: accumulation (bottom), mark-up (advance or bull market), distribution (peak), and markdown (decline or bear market).

I.A Why Business Cycles Are Not Natural Phenomena

Mainstream economics largely treats business cycles as natural oscillations of aggregate activity. Using leading, coincident, and lagging indicators, it describes how cycles unfold—unfortunately it fails to explain why they occur in the first place: the causality.

Yet widespread, synchronized business errors do not arise spontaneously in a market economy. Such aggregate misallocation occurs only when firms are influenced by a common external force—namely, inflationary monetary and credit policies imposed from outside the market process.

I.B. Credit Expansion and the Origin of Boom–Bust Cycles

As the late great dean of the Austrian School of Economics, Murray N. Rothbard explained, the business cycle is not an inherent feature of a free and unhampered market. It is generated by government-driven bank credit expansion, which artificially suppresses interest rates and induces uneconomic overinvestment—particularly in long-duration capital goods such as machinery, construction, raw materials, and industrial plant.

As long as monetary and credit expansion continues, these distortions remain masked by the euphoria of the boom. But once credit expansion slows or stops—as it must to avoid runaway inflation—the misallocations become visible. Recession is not the disease; it is the corrective process through which the market liquidates unsound investments, realigns prices, and restores coherence between production, demand, and savings. Recovery begins only once this adjustment is completed. (see reference)

I.C. Late-Cycle Fragility: Headline Resilience, Underlying Stress

We have consistently argued that both the Philippine economy and its equity market have been operating in late-cycle territory—or, in market terms already within a bear-phase dynamic.

The late stage of the business cycle is a paradoxical moment. Expansion still dominates headlines, yet the underlying machinery of growth begins to grind.

Profits remain visible, but margins thin.
Credit is still available, but increasingly costly.
Policymakers, media and the mainstream speak of resilience, while households and firms quietly absorb tightening liquidity and rising cost pressures.

This phase is defined less by collapse than by precarious equilibrium.

Imbalances accumulate as buffers erode.
Asset prices may remain elevated, but market breadth narrows.
Large firms mask stress through consolidation, transfers, and concentration strategies, while smaller players begin to falter—the periphery to the core phenomenon.
Inventories rise, debt-service burdens increase, and policy transmission weakens.

In such an environment, shocks—whether natural disasters, geopolitical missteps, or financial accidents—carry outsized consequences.

For listed corporates, late-cycle fragility manifests as earnings resilience built on substitution rather than productivity: one-off gains, margin and cash-flow deterioration, rising leverage, emerging liquidity stress, asset reshuffling, narrow sector leadership, and financial engineering—often accompanied by accounting prestidigitation that substitutes for genuine growth.

The result is a corporate landscape that appears stable on the surface yet grows increasingly brittle underneath, mirroring the broader macro paradox of headline resilience alongside systemic vulnerability.

I.D. Financial Fragility, Opacity, and the Bezzle

Furthermore, this stage of the cycle is often accompanied by what Hyman Minsky described as Ponzi finance, where cash flows are insufficient to service obligations without continual refinancing or asset appreciation.

This dynamic frequently intersects with Charles Kindleberger’s politics of swindle and fraud, and John Kenneth Galbraith’s concept of the “bezzle”—the accumulation of undiscovered financial misconduct that grows during booms and is revealed only when liquidity tightens.

Historically, major frauds tend to surface not at the height of optimism, but during the transition from boom to bust. The Enron scandal emerged as the dot-com bubble unraveled; Bernie Madoff’s Ponzi scheme collapsed amid the 2008 Global Financial Crisis; and the COVID-19 downturn exposed widespread abuse of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) program.

In late-cycle conditions, transparency deteriorates as economic stress rises. Firms, households, and institutions increasingly resort to opacity, accounting maneuvers, and even outright malfeasance—whether to survive, to exploit weakened oversight and abundant credit, or to preserve credit-fueled, status-driven lifestyles that become harder to maintain as conditions tighten.

These behaviors do not cause the cycle, but they amplify fragility, accelerating the loss of confidence once the credit tide recedes.

Part II: The Late Cycle in the Philippine Context: Economic and Corporate Activities

II.A. Macro and Policy Stimulus, An Environment Built to Support Growth

Any serious economic analysis must begin with the operating environment that shaped outcomes.

The Q3 and nine-month period coincided with what should have been the ‘sweet spot’ of monetary and fiscal support. The Bangko Sentral ng Pilipinas (BSP) had already delivered six of its seven policy rate cuts since August 2024, alongside two reserve requirement ratio (RRR) cuts—from 9% to 5% (a cumulative 400 basis points) in September 2024 and March 2025. Deposit insurance coverage was also doubled in March 2025.

Fiscal deficit also swelled to pandemic levels through Q3 2025.

II.B. The GDP Surprise—and Why It Should Not Have Been One

Despite these extraordinary supports, Q3 GDP printed a 4.0% growth rate, shocking the mainstream consensus. The slowdown came as leveraged households retrenched, exacerbated by the contraction in government construction and infrastructure outlays following the ongoing flood-control corruption scandal. (as previously discussed, see reference)

The result was a classic late-cycle outcome: stimulus saturation met weakening transmission—the law of diminishing returns.

II.C. The PSEi 30 Aggregate: A Disquieting Divergence From GDP, The Energy Trio Distortion

Against this backdrop, the PSEi 30’s operating performance exposed a sharp disconnect from headline GDP.

Figure 2

Q3 nominal GDP growth slowed from 8.6% (2024) to 4.9% (2025)
PSEi 30 Q3 revenues decelerated more sharply, from 6.8% to 1.9%
Q3 Net income growth collapsed from 11.6% to just 0.9% (Figure 2, upper window)

Inflation-adjusted, earnings growth was effectively negative—a stagnation masked only by nominal accounting.

The most consequential distortion came from the SMC–Meralco–AEV energy triangle, discussed previously. In Q3 2025, this grouping accounted for:

32.2% of total PSEi 30 revenues
15.1% of total net income

Yet even with that concentration, the triangle weighed down aggregate performance. Excluding the trio, PSEi 30 revenues and net income would have grown by 2.4% and 4.7%, respectively. What had boosted results in Q2 became a drag by Q3.

Notably, Q3 PSEi 30 revenues amounted to ~28% of nominal GDP and ~32% of real GDP—a sufficiently large share that these contrasting numbers should call the 4.0% GDP print into question.

If the largest listed firms are stagnating, aggregate output growth should have been materially lower.

II.D. The 9-Month Scorecard: The Same Story, Amplified

The 9M data amplifies the fragility.

PSEi 30 revenue growth: 8.1% (2024) → 2.07% (2025)
Nominal GDP: 9.3% → 6.55% (Figure 2, lower image)
PSEi 30 share of NGDP: declined from 27.9% to 26.9%

This narrowing occurred not as a result of robust GDP, but rather due to a deeper stagnation in corporate activity and a probable overstatement of the GDP estimate.

The energy trio accounted for 31.2% of nine-month PSEi 30 revenues, yet their aggregate sales contracted by 3.75%, dragging the index’s growth rate down.

Figure 3

Meanwhile, residue effects from prior asset transfers kept nine-month net income growth elevated at 10%, driven by a 39% earnings surge from the trio. (Figure 3, upper chart)

Ex-trio earnings growth was a far weaker 5.32%.

This is earnings growth without economic growth—a hallmark of late-cycle accounting inflation that likely also bleeds into GDP measurement.

II.E. Cash Drain, Debt Surge, and the Minsky Turn

One of the most revealing features of the nine-month data is liquidity erosion.

Aggregate PSEi 30 cash balances fell 1.72%, the third consecutive nine-month decline, reaching the lowest level since 2021. (Figure 3, lower diagram)

In contrast, the energy trio’s cash rose 22.8%, accounting for 36.2% of total cash holdings.

Figure 4

Sixteen of thirty firms recorded cash contractions averaging 11.7%. (Figure 4, upper table)

At the same time, non-bank PSEi 30 debt rose by Php 603.15 billion—the second-largest nine-month increase since 2020, lifting total debt to a record Php 5.98 trillion

Even with caveats: (as previously discussed)

This debt equals 16.8% of total Philippine financial system assets.
It represents ~29.7% of nine-month nominal GDP.
The increase alone accounted for ~75% of nominal GDP growth over the same period.

Furthermore, the PSEi 30’s cash-to-debt ratio declined to its lowest level since at least 2020, thereby diminishing firms’ financial buffers against potential shocks. (Figure 4, lower visual)

Worse, not all cash is liquid, and certain firms increasingly reclassify debt into lease liabilities or off-balance-sheet obligations.

This is textbook Minsky drift: speculative finance sliding into Ponzi structures, with firms plugging liquidity gaps through refinancing rather than genuine cash generation.

II.F. Concentration, Money Illusion, and Elite Financialization

Financial and economic concentration has accelerated sharply.

Six issuers (SMC, AC, SM, LTG, SMPH, JGS) control 55% of non-bank net assets.

Including the four major banks (BDO, BPI, MBT, CBC), concentration rises to ~75% of total PSEi 30 assets.

This centralization mirrors the broader financial system, where banks now account for 83.2% of total financial resources, confirming deepening financialization.

II.G. Sectoral Divergences: Real Estate, Retail, Food Services

Real Estate: Top 4 developers posted only 1.2% revenue growth in Q3, vs. official GDP prints of +6.8% nominal and +4.7% real. Inflation-adjusted revenues imply contraction. (see previous discussion)

Figure 5

Retail: Top 6 non-construction chains slowed to 3.7% growth—the weakest since Q3 2021. SM Retail stagnated at +0.9% despite new malls. Official retail nGDP (+6.3%) diverged sharply from corporate reality. (Figure 5, topmost graph)

Food Services: Jollibee, Shakey’s, and Max’s slowed from 9.7% to 3.6%. Jollibee’s domestic sales growth plunged from 10.1% to 4.3%. Official food services GDP barely eased (+8.95%), again overstating resilience. (Figure 5, middle image)

All this occurred amid store expansion, record consumer credit, and near-full employment—a stark contradiction of the official GDP narrative.

Yet, cases like Meralco illustrate the money illusion: rising revenues alongside shrinking physical volumes, translating to regulatory-driven profit inflation—a concealed stagflation dynamic rather than real demand growth. (see previous discussion in reference)

The divergence between PSEi 30 performance and household-spending GDP highlights a growing gap between market realities and official statistics.

Even within the GDP figures, slowing household-spending growth coincides with rising government expenditure—an indication/symptom of the crowding-out effect. (Figure 5, lowest chart)

Taken together, these discrepancies suggest inflated official output measures and weakening household consumption despite ongoing stimulus.

Needless to say, corporate stagnation alongside reported GDP resilience increasingly looks like statistical gaslighting.

II.H. Banking Fragility: Wile E. Coyote Finance

Figure 6

Banks have become the lifeblood of the economy, taking up an ever-larger share of the national accounts since 2000—a trend that has accelerated even as GDP growth weakens. (Figure 6, upper image)

The slowing economy is reflected in the PSEi 30’s four major banks: their combined bottom line fell from 5.7% in Q2 to 3.3% in Q3.

Meanwhile, the banking system’s operating income slid from 12.2% to 7.1%, even as provisions surged 539%.

The historically tight correlation between GDP and bank operating income (2015–2022) has broken down since the BSP’s unprecedented rescue of the industry. (Figure 6, lower diagram)

Banks are now running what can only be described as Wile E. Coyote operations: rapidly issuing loans to mask rising delinquencies, while expanding speculative and politically exposed positions (AFS and HTM assets) even as liquidity drains. (see previous discussion, references)

Once they pull back to preserve balance sheets—restricting credit, reducing speculation, or offloading government securities—the façade of financialization will collapse, bailout or no bailout from the BSP.

Part III: Conclusion: Late-Cycle Fragility Exposed

Slowing revenues, weakening consumers, deepening leverage, escalating profit pressures, intensifying liquidity strains, rising opacity, accounting-driven inflation, entrenching concentration, and eroding banking and easy money+ fiscal policy transmissions are not isolated developments. Together, they form a textbook late-cycle configuration.

The Philippine economy and its corporates illustrate precarious equilibrium. GDP prints still narrate strength, but the PSEi 30 reveals deepening fragility: profits masking stress, cash drained, debt piled, and incentives for malfeasance rising.

This is the anatomy of late-cycle fragility—headline resilience concealing systemic vulnerability.

Murray N. Rothbard Economic Controversies p. 236-237 2011 Ludwig von Mises Institute, Mises.org

Prudent Investor Newsletter, Inside the SMC–Meralco–AEV Energy Deal: Asset Transfers That Mask a Systemic Fragility Loop, Substack, November 23, 2025

Prudent Investor Newsletter, The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t, Substack, November 16, 2025

Prudent Investor Newsletter, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025

Prudent Investor Newsletter, Minsky's Fragility Cycle Meets Wile E. Coyote: The Philippine Banking System’s Velocity Trap, Substack, September 14, 2025